Will rupee tumble to 60 against the dollar?
The CAD measures the country's external deficit, which then need to be covered through borrowings or inward capital flows or investments. India is the only country in the region with a CAD, and a wide one at that.
It's a scary thought, but now that the rupee has sunk below the 53 mark against the US dollar, it doesn't seem that unreasonable.
For now, most experts believethe rupee's weakness against the greenback is likely to sustain. Currently, the rupee is trading at 53.44 against the dollar. The currency hit an all-time low of 54.30 in December 2011.
The reasons for the rupee's weakness have been mentioned several times before : a widening current account deficit (CAD), continuing oil imports at high prices, fears of inflation re-emerging, and the complete lack of progress on economic reforms.
Without doubt, the CAD is the biggest worrying factor at the moment. The CAD measures the country's external deficit, which then need to be covered through borrowings or inward capital flows or investments. India is the only country in the region with a CAD, and a wide one at that.
A Bank of America-Merrill Lynch report points out that India's relatively modest forex reserves - with the lowest import cover since 1996 - do not provide enough ammunition for a strong defense of the rupee, according to this Reuters report.Moreover, the central bank has limited firepower to intervene should the rupee continue to fall, given that dollar sales would exacerbate an acute liquidity crunch in India's banking system.
Today, a Morgan Stanley report also highlights thatIndia faces a "high" risk of a shock in its balance of payments, unless the government cuts spending, including on subsidies, or oil prices decline sharply. Fat chance any of that will happen.
The balance of payments represents the net difference between exports and imports, including financial imports and exports. A negative balance of payments means more money is flowing out of the country than coming in, and vice versa.
Worryingly, the UPA seems to be sleep-walking through it all, as thisFirstpoststory noted earlier.
The dimming prospects of the economy, as well as a whole host of other worries (CAD being one of them), was what prompted ratings agency Standard and Poor's to lower its outlook on India's sovereign credit rating to negative from stable recently and overseas investors to pull out Rs 777 crore from financial markets in April. In contrast, in the first three months of 2012, foreign investors invested a record Rs 43,951 crore.
Back in December, a widely-publicised CLSA report predicted a dramaticplunge in the Sensex and the rupee if India's gross domestic product estimates were lowered to 5-6 percent from above 7 percent, bad loans among banks increased, and policy inaction continued.The brokerage predicted the rupee could tumble to 60 against the dollar under those conditions. The Sensex could also dive to 12,ooo, it said.
We just might get there.
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It expects the Reserve Bank of India to signal lower rates but hold the rates until December. However, the central bank will take steps to improve liquidity.
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