Steps to stem rupee’s slide will not work

First, the facts: Worsening global risk-taking appetite and deepening malaise in the Indian economy pushed the Indian rupee to record lows against the US dollar on Friday, June 22, 2012.

That day, the exchange rate slumped to Rs57.32 vs. $1 (Rs15.60 vs. Dh1) at about 11.15am UAE time (7.15am GMT).

Indian Finance Minister Pranab Mukherjee said he was “concerned but not depressed” about the decline.

Perhaps he should be depressed, considering that the rupee has lost more than 30 per cent of its value in less than one year. The rupee-dirham exchange rate on August 2, 2011, was Rs11.998 vs. Dh1. On June 22, 2012, that rate was Rs15.605 vs. Dh1.

Importantly, the rupee has lost more than 12 per cent in the past 12 weeks – from Rs13.84 on April 3, 2012, the rupee slumped 12.7 per cent until Friday, losing an average of more than 1 per cent every week since the beginning of April.

The Indian rupee was the worst performing emerging markets currency last year. It threatens an encore this year.

Analysts have attributed the rupee’s decline to the country’s widening current-account and fiscal-account deficits amid slowing domestic growth and high inflation.

The economy, which was one of the world’s star performers during the 2008-09 economic meltdown, has seen its fundamentals decline rapidly in the past three years, making its currency vulnerable to the global investor’s risk-aversion stemming from the widening sovereign-debt crisis in Europe and concerns about slowing global growth.

Last week, global credit rating agency Fitch lowered India’s sovereign-credit outlook to negative from stable, citing heightened risk of further deterioration in the country’s growth potential, and a failure in controlling the nation’s ballooning twin deficits.

In late April, Standard and Poor’s, another global ratings agency, put India’s economy on watch for a downgrade, citing the country’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 due in 2014.

S&P had, in early June, further warned that India is in danger of becoming the first among the BRIC nations to fall a ‘junk’ investment grade.

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 and in effect attaining ‘junk’ 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.

Depressingly, the rupee has been in a freefall despite the Indian government’s various efforts to shore up the beleaguered currency.

These include providing sops to Non-Resident Indians (NRIs) for investing their foreign currency earnings in India and, more recently, steps to improve inflow of foreign investment.

“In certain areas, we have to take appropriate measures. We have already started taking appropriate measures...These have started yielding results. But its impact will take some time,” Pranab Mukherjee said last week while responding to queries on the issues raised by global rating agency Fitch.

“There is some improvement in FDI and FII inflows,” he said, adding the steps taken by the government to relax External Commercial Borrowings norms and creation of Infrastructure Debt Fund were yielding results.

Late last month, when Indian Prime Minister Manmohan Singh decided to defend the rupee by insisting that the rupee was getting battered only “against the backdrop of global economic problems and the euro zone debt crisis,” and that “[t]his is a phenomenon which is not going to last very long,” the rupee almost immediately made fresh lows in the global exchange market against the US dollar.

That was on May 31, 2012, when the rupee sank to 15.36 against Dh1 (Rs56.44 vs. $1). Today, with that exchange rate at Rs15.60 vs. Dh1 (Rs57.32 vs. $1), Singh’s statements stand exposed.

Moreover, while addressing specific concerns raised by Fitch last week, Finance Minister Mukherjee chose to adopt the ostrich tactic, and rejected the ratings agency’s assessment saying that its action was based on “old data” and that more recent data showed a positive turnaround.

“Fitch has primarily relied on older data, and has ignored the recent positive trends in the Indian economy,” Mukherjee had said in a statement.

If that is indeed the case, then the market too seems to be ignoring the more recent ‘positive trends’, as is obvious by the rupee’s continuous decimation.

Mukherjee is expected to soon resign from his post, not because of his failure to stem the rot in the Indian economy and therefore the rupee, but to contest the presidential election.

He’s probably resigning for the wrong reason.

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