In a reversal of the short-term trend, the Indian rupee declined by more than 1.16 per cent in early trade this morning on news that Pranab Mukherjee, the former finance minister of India, has been elected President of the country.
The Indian rupee fell to 55.95 against the US dollar and 15.23 against the dollar-linked UAE dirham, its lowest since July 13, in early trade on Monday as the dollar strengthened against euro and other currencies in the overseas market.
While his supporters have proclaimed that the much-needed economic reforms agenda will get back on track in India now that Mukherjee has been elected President, the markets voted with their wallet this morning by pulling out investments on fears that the policy paralysis that plagued the finance ministry under Mukherjee’s leadership will continue now that he has titular responsibilities of the country.
Ominously, Mukherjee is India’s 13th President, and not many market players seem to think that that’s lucky for their investments. The benchmark Bombay Stock Exchange Sensitivity Index, or Sensex, had declined by over 212 points by 12.15pm India time (10.45am UAE time), and has edged below the psychological 17,000-points-mark for the first time this month.
Analysts claim that the Indian currency may be coming under renewed attack on fresh concerns over Spain’s borrowing costs and the fate of the euro zone.
Indian expatriates, or Non-Resident Indians (NRIs) as they are popularly known, have had a good run with the exchange rate this year, with a constantly weaker rupee making their remittances that much sweeter.
However, when Indian Prime Minister Manmohan Singh took over the reins of the Finance Ministry late last month, he made sure he did with a bang and announced some much-needed concrete steps to clarify taxation limits on foreign companies.
This resulted in an almost instant flow of overseas funds into the Indian economy, prompting a reversal in the beleaguered rupee’s direction.
Nevertheless, with the former finance minister who the markets accuse of lacking in decision-making, now becoming the President of the country, things seem to be coming to a naught again.
Despite the ongoing battering, though, analysts believe that the rupee, after being hammered for the better part of last year and the first half this year, can make a recovery provided the government initiates an active reforms agenda to bridge its ballooning fiscal and trade deficits.
“The RBI’s measures create scope for additional foreign inflows to come into India, which will materialise if the domestic policy environment and the risk appetite of foreign investors improve,” said a recent report by Crisil, an Indian ratings agency.
“We assign a relatively higher probability to rupee settling at around 50/USD by March-end 2013,” the agency said in its report.