The Indian rupee crashed to an all-time low of Rs14.68 against the UAE dirham, and Rs53.90 against the US dollar this afternoon at 12.50pm UAE time (8.50am GMT) even as modest intervention by the country’s central bank yesterday failed to stem the rupee’s slide.
The immediate trigger for the decline has been a rising dollar demand from importers, but a deteriorating macroeconomic situation, years of policy uncertainty and decades of fiscal mismanagement, coupled with renewed risk-aversion among global investors is leading to weak foreign fund inflows, which is in turn widening the country’s budgetary deficit and further corroding its currency’s value.
The rupee is now officially in no-man’s land, with a section of analysts, including those at Swiss investment bank UBS, claiming that the rupee is headed towards the 56-mark against the US dollar (Dh 1 = Rs15.24) in the face of a “severe” deficit drag, the need to “repair” its balance sheet and regulatory ambiguity that it says has reached a “crisis point.”
"We all know the current account deficit problem, the trade deficit problem. Even seasonality is bad during this period of the year and we need FII [foreign institutional investment] flows, but FII flows have dried down over the past month. So that is putting the rupee under pressure," Vivek Rajpal, Rates Strategist, Nomura India, told ET Now, a business news channel.
"If the RBI intervenes at correct levels in the right amount, we may hold the previous highs that we saw. Otherwise without the RBI intervention and without FII flows, the rupee may continue to remain under pressure," he added.
While the decline is inflationary, and heralds bad news for India’s billion-plus consumers who will have to shell out more money to buy anything that is imported from a foreign country, the rupee’s slump means that Indians living overseas (non-resident Indians, or NRIs) are better off, with their dollars, dirhams or dinars earning more rupees and therefore boosting their remittance ability.
India is already the world’s largest recipient of foreign remittances, with the country’s overseas workers remitting a record $63.6 billion in 2011, according to a recent World Bank report. This was 18 per cent more than the $54 billion that NRIs remitted in 2010.
The Indian stock markets are reacting violently to this value erosion in the rupee, with the benchmark Bombay Stock Exchange Sensitivity Index (Sensex) down almost 7 per cent in two-and-a-half-months despite some Indian corporates announcing stellar results last quarter.
This decline, symptomatic as it is of a larger rot in the Indian financial fabric, is leading ratings agencies like the Standard and Poor’s to put the country’s economy on negative watch, forcing analysts to ask if Indian economy’s dream run is over.
Lowering its outlook for the country’s economy late last month, S&P cited India’s struggle to rein in its relatively high debt and fiscal deficit amid a political impasse that is unlikely to ease before the next national general elections in 2014.
The ratings agency said that India has a one-in-three chance of seeing a debt downgrade in the next 24 months. Any downgrade will see Indian debt losing its investment grade status, with the S&P currently rating the country’s debt at BBB-, the lowest investment-grade rating.
The country’s industrial growth has been slowing down since last year, and export growth too has witnessed a sharp decline since the second half of 2011.
On the other hand, its imports bill has been rising steadily thanks to higher crude and gold prices. The country reportedly imported gold and silver worth $60 billion in 2011/12, pushing up the trade deficit to near $185 billion, and is in desperate need for foreign investment to finance this yawning deficit.
The rate of growth in exports has been plummeting continuously since July, when it hit 81.79 per cent. In imports, the monthly growth rates have been highly volatile. The trade deficit has widened to $93 billion in the first seven months of this financial year and could even breach $150 billion.