So, the rupee tumbled and closed at 53.83 against the dollar on Wednesday. It’s inching dangerously close to the 54-mark. Again.
Deja vu much? Most currency experts believe it’s only a matter of time before the rupee breaches its all-time low of 54.30 against the dollar hit in December. Increasingly, the bet is that it might establish a new low against the greenback in coming months. In a recent interview with CNBC TV18, a CLSA technical expert warned that the currency could plunge to 56-58 against the dollar if it failed to hold the 54 mark. A poll by The Economic Times also suggested the rupee could hit a new low of 57 against the US currency in the next three months.
Can nothing save the rupee then? As they say, nothing is impossible, although some things are more possible than others.
Here are some things that can sustainably reverse the slide, but really, don’t hold your breath.
One, our trade deficit, which stood at a whopping $185 billion in the past financial year, needs to come down. That can primarily be achieved if either oil or gold imports, which together account for roughly over 40 percent of imports, come down.
India's twin deficits (current account and fiscal deficits) mean it needs foreign funds to plug its balance of payments gap. Reuters
The government has already introduced a few measures to curb gold imports but it can’t do much about oil imports, since the country imports more than 80 percent of its annual crude oil requirements. However, if oil prices fell, that could reduce the demand for US dollars (crude is priced in dollars) and ease pressure on the rupee.
Two, foreign funds continue to flow robustly into India. Accomplishing that is a bit tricky though, because inflows depend on a host of factors. At the moment, several things are going wrong with India, which are lowering confidence among businesses, investors and even consumers.
Inflation remains stubbornly high, with fears that it could rise higher in coming months. That has dashed hopes of getting a bounty of interest rate cuts to jump-start the economy. Growth has effectively stalled around 7 percent, far below the 9-percent plus estimated a few years ago. The government’s high fiscal deficit and its subsequent attempts to generate more tax revenues by pursuing with controversial proposals such as the retrospective taxation (which will directly hit Vodafone and other international companies) are not exactly supporting enthusiasm for investing either.
The government needs to assure foreign — and local — investors that it is not engaging in a witch-hunt because like it or not, India’s twin deficits (current account and fiscal deficits) mean it needs foreign funds to plug its balance of payments gap.
Three, the government picks up the pace of economic reforms. If investors, local and foreign, become confident that India’s economy is in for some rejuvenation, they could be prodded into investing in more local assets, such as stocks and bonds. That would increase demand for the local currency and revive its flagging fortunes. Easier said than done.
Four, governments around the world decide to unleash another round of monetary easing measures. Some international brokerages are betting on QE3 (a third round of quantitative easing) by the US Fed as well as monetary expansion from the European Central Bank given the two region’s continuing economic woes.
Quantitative easing measures typically let loose a gush of cheap money that seeks out investments in relatively higher-yielding assets, such as those in emerging markets. If QE3 money comes into India’s financial markets, it will boost the value of the rupee.
Of course, it will give an unwanted push to inflation — and asset prices– as well, so under the current set of circumstances in India, this kind of money won’t exactly be a blessing for the economy.
Five, uncertainty about the eurozone eases. If things got better in Europe (and there doesn’t seem to be much indication of that), investors could recover their appetite for relatively riskier assets and invest in emerging markets wholeheartedly again. Currently, fear has enveloped investors, who are fretting about what the French and Greek elections mean for the future of the single currency, euro, as well at the slow pace of economic recovery in the US. That is putting them off from investing in riskier, emerging market assets.
If they felt more confident about the global economy’s prospects, they would not all be seeking the safe haven of dollar investments.
Perhaps it’s time to start praying?
