Indian rupee sinks again: Rs18.58 vs Dh1

Update: The rupee was trading at 68.21 to the US dollar at 8.35 UAE time and at 18.41 to the UAE dirham. It earlier rose to as high as 68.50 against the US dollar and 18.65 against the UAE dirham at 7.50 UAE time.

India's currency slid again on Tuesday and the share market crashed nearly 3.5 per cent in another major sell-off caused by uncertainty in the Middle East and a new gloomy economic forecast by Goldman Sachs.

The rupee was down 3.25 per cent at Rs18.55 vs. Dh1 (Rs68.15 to $1) at 2.30pm UAE time (10.30am GMT) while shares closed down 651 points or 3.45 per cent to 18,234.66 points.

"In India, we have cut our full-year GDP growth forecast to 4 per cent, from 6 per cent," Goldman Sachs said in a note to clients.

The investment house added that the rupee was likely to reach 72 per dollar (Rs19.60 vs. Dh1) in six months' time, recovering to 70 over a 12-month horizon.

Goldman Sachs added growth could be even weaker and the rupee might fall further than its targets "especially if there are pressures on the banking and corporate sectors due to weakness in growth".

Goldman Sachs joined a string of investment houses from HSBC to Nomura which have cut their growth forecasts for the once-booming Indian economy.

The most bearish was BNP Paribas, which slashed its forecast to 3.7 percent from 5.2 percent target, saying India's "macro muddle" was nearing crisis levels.

But a top adviser to Prime Minister Manmohan Singh rejected the investment houses' dire projections.

India's economy is likely to grow around 5.5 percent this fiscal year, lifted by strong farm output, C. Rangarajan told reporters in New Delhi.

Agriculture growth should reach four-to-five per cent this year, thanks to bountiful monsoon rains, boosting expansion, said Rangarajan, chairman of the Prime Minister's Economic Advisory Council. The agriculture sector grew just 1.7 per cent last year.

"Even if we assume the non-farm sector will grow at the same rate as last year, the GDP growth rate would be closer to 5.5 per cent," Rangarajan said.

India's economy grew by just 4.4 percent in the first three months of the fiscal year, the slowest quarterly expansion in over four years, sparking widespread worry about its prospects.

The concern was amplified on Monday when an HSBC survey showed that India's manufacturing shrank in August for the first time in over four years.

India's growth rate slowed to decade low of  five percent last year, partly due to high interest rates which weighed on demand.

Russian reports of missile launches in the Mediterranean Sea accelerated the downward trend in mid-afternoon trading.

The stock market plunge was led by banking shares on worries about the effect of corporate bad debts on their balance sheets.

The rupee's depreciation will pose a major challenge for Raghuram Rajan, the new central bank governor, who takes charge Thursday, replacing outgoing chief Duvvuri Subbarao.

"We saw a temporary recovery in the rupee," said Param Sarma, chief executive with consultancy firm NSP Forex, referring to a two-day rally late last week.

"But this could not be sustained" amid persistent concerns about the economy, Sarma said. 

The currency has also been depressed by the record current account deficit -- the broadest measure of trade -- which has been fuelled by India's massive oil import bill.

Earlier report

After holding steady for about a day, above the Rs66-mark against the US dollar and Rs18 against the UAE dirham, the Indian rupee slumped again on Tuesday morning, slipping almost 3 per cent to Rs68.05 against $1 and Rs18.51 vs. Dh1 at 1.45pm UAE time (9.45am GMT).

The rupee held relatively steady after last week’s data showed that the country’s GDP growth had slowed down more than expected, to 4.4 per cent in the most recent quarter (April-June). However, more bad news emanating from the markets suggests that India’s economic woes are set to worsen going forward.

India’s latest manufacturing PMI (Purchasing Managers’ Index), which shows the level of raw material purchasing activity at factory level, showed contraction for the month of August, signalling a further perceived slowdown in demand.

An HSBC survey of purchasing managers at manufacturers across India, published yesterday (Monday), revealed a bleak outlook for the economy as raw material demand at Indian factories came out at its worse since March 2009, when the global economic crisis is largely believed to have bottomed out.

The rupee had, by end-August, lost more than 28 per cent of its value in less than four months (since May 2) when it made a lifetime low of Rs18.80 vs. Dh1 (Rs69.05 vs. $1) but then managed to stage a minor recovery after the Reserve Bank of India (RBI) supposedly stepped in to support the currency by selling dollars in the open market.

However, a double dose of bad news – the bleak PMI data came right after weaker-than-expected GDP growth numbers – was enough for the rupee to once again get on with its descent in early trade on Tuesday.

A number of analysts now believe that the Indian economy – and with it the beleaguered rupee – will see more pain ahead before gaining a footing and stabilising next year.

Apart from its own ballooning fiscal deficit thanks to a huge demand for imported oil and gold, India’s financial difficulties are being exaggerated by the expected tapering off of the US quantitative easing programme.

The US Federal Reserve is expected to announce a (nominal) reduction in its $85-billion-a-month bond buying programme, which is likely to hurt markets like India as a good proportion of such freshly minted money finds its way into emerging markets.

“The week gone by saw the Indian rupee continuing to lose against the US Dollar as investors fretted over fears of how the country will fund its large current account deficit as the US Federal Reserve is expected to begin tapering its monetary stimulus. The rupee hit a series of record lows during the week as the USDINR pair gained 3.71 per cent week-on-week,” wrote HDFC Securities’ analyst Subash Gangadharan in his weekly currency market perspective published today.

Last week, Indian Prime Minister Manmohan Singh tried to quell fears over the Indian economy and the rupee by making a rare speech in Parliament over the country’s recent economic woes. He insisted that the country does not face a 1991-style balance-of-payments crisis, and that fears that economic growth could slow down to 3 per cent were unfounded.

“There is no reason for anybody to believe that we are going down the hill and that 1991 is on the horizon,” he reportedly told the Indian Parliament.

“Prime Minister Manmohan Singh sought to soothe worries about the Indian economy on Friday, telling parliament that the crashing value of the rupee was part of a needed adjustment that would make Asia’s third-largest economy more competitive,” wrote HDFC Securities’ Gangadharan in his latest currency market report.

“The speech was the veteran economist’s first substantial comment to parliament since the rupee suffered its steepest ever monthly fall in recent weeks, bringing back memories of a 1991 balance of payments crisis that made Singh famous,” he wrote.

“Reading from a written statement, the prime minister promised his government would reduce the “unsustainably large” current account deficit undermining the currency. Clearly we need to reduce our appetite for gold, economise the use of petroleum products and take steps to increase our exports,” he wrote.

However, as Singh noted in his televised speech, a weaker currency is the outcome of several years of high inflation, and the rupee’s unprecedented decline may, in fact, bring some economic benefits.

“To some extent, depreciation can be good for the economy as this will help to increase our export competitiveness and discourage imports. Singh’s deft handling of the 1991 crisis helped launch 20 years of rapid economic growth and he has since been credited as the architect of India’s emergence as a serious economic power,” wrote Gangadharan.

Going forward, the HDFC Securities’ analyst believes the rupee could fall to Rs18.73 vs. Dh1 in the short term, still short of last Wednesday’s lifetime low.

“Technically, the USDINR pair remains in an intermediate uptrend, which could take it to our targets of 68.83 [18.73 vs. Dh1] in the coming sessions.”

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