Rupee cocks a snook at Indian PM; sinks to fresh record low
The Indian rupee sank to record fresh lows of Rs15.37 against the UAE dirham and Rs56.46 against the US dollar at 10.50am UAE time (6.50am GMT) despite recent reassurances by the country’s prime minister about this (the rupee’s decline) being a temporary phenomenon and that the currency will soon reverse its trend.
Cocking a snook at Prime Minister Manmohan Singh’s rather biased claims that the rupee is getting battered only “against the backdrop of global economic problems and the euro zone debt crisis,” the markets have chosen to ignore the Indian premier’s somewhat misplaced conviction that “[t]his is a phenomenon which is not going to last very long,” and have continued to dump the beleaguered rupee in favour of the dollar.
The rupee is now down more than 28 per cent from its 52-week low of Rs11.998 against the UAE dirham, made less than 10 months ago. In addition, global banks such as Standard Chartered and UBS maintain that there remain chances of a further downside to the rupee, considering India's dire economic state compounded by the euro zone crisis.
Indian officials, however, have been insisting that it's only the global scenario that is pulling the rupee down. The Indian Prime Minister does know a thing or two about how the world economy works. After all, he is an economist par excellence, having studied economics first from the Punjab University in India, and then going on to read for the Economics Tripos at Cambridge as a member of St John’s College.
He also won the Wright’s Prize for distinguished performance in 1955 and 1957, and was one of the few recipients of the Wrenbury scholarship. Singh completed his studies from the University of Oxford, where he was a member of Nuffield College.
How come then this man, who excelled throughout his academic career and has been India’s Finance Minister in the past, is now unable to defend a growing economy’s currency against global headwinds?
Politics is the short answer to Singh’s economic failure.
Leading a coalition government that has more dissidents than supporters, Singh’s dilemma is to remain in power until the next general elections – due in 2014 – without upsetting the applecart.
In trying to do so, his government has adopted an approach that seems to say: ‘If we do nothing, we can do nothing wrong’. I.e., the government has famously slipped into a policy paralysis, ignoring ballooning fiscal and trade deficits, postponing major policy decisions, turning a blind eye to individual states’ profligacy and doing practically nothing to prop up a slowing economy.
“The Indian rupee is already under strong downside pressure due to the weak domestic backdrop and rising balance-of-payments concerns,” Standard Chartered bank said in a report yesterday, adding that the country’s central bank remains helpless in stemming the rot owing to the extent of the malaise.
“The Reserve Bank of India (RBI) recently announced a slew of measures, along with greater intervention efforts. However, we expect such actions to provide relief only during periods of stable global risk appetite. They are not enough to fully offset the continuing fundamental stresses on the Indian rupee, in our view,” it said.
It is indeed a miracle that the economy has not yet ground to a halt. However, the way things are moving – with even the opposition parties trying to gain political mileage out of the sad situation by demanding a complete rollback of the recent much-needed petrol price-hike in the country – maybe not even a miracle can save the Indian currency from declining further.
In yesterday’s report, StanChart said Greece’s exit of the euro zone can, technically, trigger a further weakness in the rupee, which could see it crash-land at Dh16 vs. Dh1.
“A turnaround in the Indian rupee’s trajectory requires policy reforms leading to an improved growth outlook, as well as a stable global backdrop. Thus, European contagion will exacerbate downside risks to the Indian rupee. With USD-INR trading through its all-time high of 54.305 on 16 May, a move towards 58.54-58.62 is technically possible,” the bank said.
“While valuations and policy makers’ increased determination to address currency weakness may provide some stability to USD-INR, the up-move is likely to extend further in the immediate aftermath of a Greek exit from the euro area.”
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