Can RBI do anything to stop the rupee's slide?

Down, down, down.

That’s the direction the rupee seems to be heading at the moment. Today, the rupee hit fresh lows every few hours; currently, it is trading at 53.37 against the US dollar after hitting 53.51 a while ago.

So, why is the Indian currency unit being pounded so much?

Two reasons. The first is the growing eurozone crisis, which has prompted foreign investors to shun relatively riskier emerging market assets like Indian stocks and the currency, and seek refuge in safe havens like the US dollar. Global demand for dollars has surged, driving up the price of the greenback against other currencies.

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The second reason is mounting concerns about the local economy: industrial output shrank by 5.1 percent in October, the first time it plunged into negative territory since June 2009. Slowing GDP growth, high borrowing costs, high inflation and falling demand have contributed to a relentless weakening of the rupee since July this year.

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The rupee has lost 15 percent this year, the worst performer among Asian currencies.

“There is nothing positive for rupee at this stage,” said Moses Harding, head of economic and market research and executive vice-president at IndusInd Bank, in a client note.“The fundamental concerns on trade gap; capital flows and growth pressures will stay valid into short/medium term. The higher fiscal deficit and low growth might bring India into rating watch. Overall, rupee bear run is expected to continue into short term.”

Worse, no one seems to know where it will all end. Last month, HSBC warned the rupee could fall all the way to 58 against the dollar.

The RBI has been making token interventions in the market to prop up the rupee, mostly to shave some of the “speculative froth” in the currency markets, but experts said those efforts are unlikely to have any sustainable effect on reversing the rupee’s slide.

In the recent past, the central bank has also introduced measures to attract foreign capital portfolio flows and made it easier for companies to hedge their currency risks.

Now, tougher measures might be in store.

Possible steps the RBI can take

Shubhada Rao, chief economist at Yes Bank, told Firstpost state-run oil companies might be allowed to buy dollars directly from the Reserve Bank of India instead of through the foreign exchange market.

State-run oil companies are the biggest dollar buyers in the forex market; according to one estimate, they need to pay for crude oil imports of up to $6 billion every month. Buying from the RBI directly could ease some pressure in the forex market and help stabilise the rupee.

Another option, Rao said, would be to further enhance steps taken by the RBI last month, such as raising the rate on non-resident deposits (to encourage capital inflows) and directing Indian companies to immediately bring back funds raised through external commercial borrowings if they are meant to be used for expenditure in India (bringing back foreign funds into India requires converting into local currency, which increases demand for the rupee and raises its value).

Don’t expect these measures to stop the rupee’s slide though, even if they do possibly slow the slide.

In the end, sentiment on the rupee is dominated by external factors and the RBI has no control over that. The government could do its bit and launch some big-bang reforms to kick start the economy, but after the retail foreign direct investment fiasco, hope seems to have been all but abandoned on that front.

Tim Condon, Singapore-based head of Asian research at ING, summed up the situation perfectly when he told Bloomberg recently: “Anything that opens up the economy is positive for growth and risk assets like the rupee. But the origin of the problem is not India, so the rupee and any measures that India takes are hostage to the wider world.”