The rupee dropped to its lowest level in three weeks today and hit 56 against the dollar, hurt by mild losses in the share market and dollar demand from oil refiners.
At 10:11 am, the rupee was at 55.99/56.00 per dollar, compared with Wednesday’s close of 55.9050/9150. The unit hit a low of 56.01, its weakest since August 16.
The almost flat trading in the stock market indicated lesser capital flows into the equities, adversely impacting the rupee.
In an interview with Bloomberg,Andrew Swan, Managing Director, & Head of Asian Equities within the Portfolio Management Group at BlackRock, said if India’s fiscal deficit is not addressed, the rupee will continue to be weak. “Remove policy inaction for reacceleration of growth,” he said.
Research firm Nirmal Bang in its latest report on the currency has said the rupee is likely to remain volatile in the next two weeks due to crucial events like the FOMC meet and ECB policy meet followed by German Court’s ESM decision.
Nomura sees the rupee hitting 54.5 in the near term due to global policy stimulus and possible measures from the RBI to stimulate inflows. It sees the country’s current account deficit shrinking in the near term.
It, however, expects the currency to depreciate in the medium term driven by the weak BOP outlook.
“The root of India‟s weak BOP is political gridlock and a large budget deficit, which have led to an inhospitable investment climate. Unless these fundamental problems are fixed – which we doubt – India will struggle to avoid a rising investor risk premium and renewed depreciation pressures on the rupee,” it said in a recent research report.
It sees a lack of fiscal consolidation constraining the monetary policy stimulus.
Without any significant structural reforms, Nomura expects the rupee to hit record highs and even hit even 60 around July-December 2013.