Indian rupee slumps; will it make another low?

The Indian rupee fell to a three week low this morning, slumping below 56 to one US dollar, and Rs15.25 against the UAE dirham at 11.50am UAE time (7.50am GMT).

Continued dollar demand from oil importing Indian firms, coupled with persistent concerns about euro zone debt, is keeping the rupee depressed, analysts said.

Market traders and forex experts believe that rupee could slide further and challenge its lifetime low of Rs15.37 against Dh1 (56.52 against $1) that it made on May 31, 2012.

“Traders fear that the Indian rupee could approach the record lows of 56.52 [against the US dollar] hit on May 31, should confidence in the domestic economy deteriorate, or if the global risk environment worsens,” said Subhash Gangadharan, currency analyst with HDFC Securities.

However, many traders expect the Reserve Bank of India (RBI), country’s central bank to intervene if the rupee falls below Rs15.30 against Dh1 (rs56.20 against $1) in the short run.

“The Indian rupee continued to weaken against the US dollar last week. The weakness came on the back of the RBI’s decision to keep the interest rates and cash reserve ratio unchanged. A Fitch downgrade of the country’s sovereign outlook also hurt the rupee,” said Gangadharan.

With uncertainty looming in the global economic domain, emerging market currencies, especially the Indian rupee, are likely to be hit hard if the inflow of bad news continues unabated.

“In case of severe deterioration in the global investor risk appetite, the most likely immediate impact would be a sharp depreciation of the rupee and a steep fall in the equities. Other asset classes would also come under a lot of strain,” said Gangadharan in his weekly currency update yesterday.
Adding to the flow of bad news is the shortage of US dollar supply in India, something that can have an immediate impact on the Asian currency.

“Dollar shortage in the inter-bank market could become severe as there would be a flight of capital and inter-banking funding markets could freeze for some time, like during the Lehman crisis, the previous most severe market dislocation in 2008. Rupee liquidity would also be squeezed, as the RBI would have to intervene aggressively and sell dollars to stem the pressure on the rupee,” said Gangadharan.

“We may re-test recent record lows as soon as by the end of this week, and hence need to watch out for RBI, unless we get some positive moves from the government,” he added.

“The economic impact on India of the euro zone troubles would be particularly severe at a time when growth is already slowing. Export demand would shrink as external demand has a close correlation to world trade growth. Global trade contraction is highly likely in the event of synchronised recession in major global economies,” he explained.

“Investment cycle in India would be hampered severely and even domestic consumption would be adversely impacted on account of a loss of confidence,” he added.

Gangadharan explained that the current week is critical for the Indian rupee as a number of factors are coming together, pushing the currency lower.

“This week will prove very crucial in deciding the near-term price trend in the global currency markets. Traders fear that the Indian rupee could approach record lows. The burden now falls on the government to revive growth and close its fiscal and current account deficits, but it would need to regain the confidence of markets after policy inaction and reversals were key reasons behind the rupee’s slump last month,” he said.

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