Why the rupee is such a drama queen

The rupee is being a drama queen again.

On Friday, it hit a fresh three-month low of 52.20 against the US dollar.The currency is being weighed down by a host of worries, none of which are likely to go away in a hurry. So, expect the rupee to tumble further in coming months - and make a scene about it.

So what’s bothering the currency, which has turned incredibly volatile in recent months? Quite a few things, actually.

**One,**the trade gap (the difference between exports and imports) hit a record $185 billion for 2011-2012, according to data released on Thursday.The government relies on partially closing this gap with the help of net foreign exchange remittances and other payments. But even these seem to be of little help. The current account deficit, or CAD (the trade gap plus cash transfers) is likely to hit a steep 4 percent of GDP in the financial year ended 31 March, according to new estimates.

A wider CAD indicates greater demand for foreign currency than what is earned, which will likely continue to pound the rupee.

**Two,**this year promises little relief on imports - or exports. Global oil prices continue to be high. Crude oil accounts for the largest expense in India’s imports bill and the country imports more than 80 percent of its annual requirements.

[caption id=“attachment_282489” align=“alignleft” width=“380” caption=“Against a backdrop of an increasing shortage of dollars in the forex market expect the rupee to face relentless pressure.Reuters”] [/caption]

So, count on heavy demand for the greenback from state-run oil marketers, who are the top importers of oil. Against a backdrop of an increasing shortage of dollars in the forex market (since everyone is diving into it as a safe haven) expect the rupee to face relentless pressure. Meanwhile, given the clouded outlook for exports, exchange earnings from this route are not expected to expand by much.

Three, the Reserve Bank of India’s surprise 50 basis point cut in its policy rate, the repo rate, earlier this week has brought inflation concerns to the forefront. Investors are worried that if inflation remains high, the central bank will have extremely limited scope to cut rates further which, in turn, will effect economic growth.

The wholesale price index came in 6.89 percent for March, slightly lower than February’s reading of 6.96 percent.However, given the array of forces pressuring prices, it’s a fair bet to say that inflation will hover above 7 percent, if not higher, in 2012-2013. Economic growth is also not expected to rise much above 7 percent.

It’s highly possible if investors might feel disinclined to sit through boring economic growth and get up halfway through the show to search for the next upcoming emerging market star. If foreign money moves out the country, the rupee’s value will fall. No wonder, the rupee is in jittery mood.

**Four,**the government looks absolutely helpless to lift the sagging economy out of its rut.Outgoing chief economic advisor Kaushik Basu acknowledged as much when he said major economic reforms are unlikely to happen before the next Parliamentary elections in 2014. If that chilling prediction comes true, India will be saddled with stubborn inflation, low to moderate growth and a stubbornly high CAD over the current financial year.

In other words, the economy is likely headed towards stagflation - and perhaps nothing can stop it. Again, a reason not to invest in the country.

Can you then blame the rupee for acting up?