India’s rupee, Asia’s worst performing currency this year, could be bound for “uncharted waters,” analysts say, as fears about eurozone debt and a slowing economy pump demand for the US dollar.
The rupee slipped to 51.20 per US dollar on Friday — a 32-month low — with no sign that it has bottomed out.
“There’s nothing preventing the rupee heading into uncharted waters. We don’t really know where it will stabilize against the dollar,” HDFC chief economist Abheek Barua said.
PHOTO: AFP
The rupee has fallen 15 percent since July on worries over the debt crisis and concern about deceleration in Asia’s third-largest economy, sparked by 13 rate hikes that have failed to curb near double-digit inflation.
Former chief Indian government economic adviser Shankar Acharya has warned the economy could grow by less than 7 percent in the financial year ending in March next year — down from 8.5 percent last year.
“The currency is suffering from global risk aversion, which is likely to increase rather than decrease, as well as from weakening domestic macroeconomic fundamentals,” Credit Agricole economist Dariusz Kowalczyk said.
Money has been flowing out of India into US assets such as treasury bills — seen as safe bets in times of crisis. The falling rupee is bad news for India, aggravating inflation and pushing up the price of imports.
India is a net importer of foreign goods, with one-third of the total made up of crude oil imports used to power the energy-hungry nation. Other imports include steel, coal and rubber, driving up costs for manufacturers that will be passed on to consumers.
While exports will be cheaper, currencies of other countries have also fallen against the US dollar, although not as much, diminishing India’s advantage.
India’s central bank has expressed hesitation about intervening to support the rupee, suggesting it may not even have the resources.
Reserve Bank of India Deputy Governor Subir Gokarn said it would be a “risky strategy” if the bank were to “try and resist or try and do something for which we do not have a capacity.”
India’s foreign exchange reserves of about US$320 billion are just one-tenth of neighboring emerging market giant China’s.
Traders say the central bank may be exacerbating pressure on the rupee by advertising its reservations.
“These defeatist statements aren’t helping, it’s like open season on the currency,” a Mumbai currency trader said.
Laurence Balanco, technical currency analyst at investment house CLSA told India’s CNBC TV-18 the rupee could slide to 58 against the US dollar if it crashes through the 52 mark.
Not only is the rupee the worst performer among major Asian economies, so is India’s stock market, which has fallen more than 21 percent since the start of this year.
The rupee touched a record peak of 39.40 to the US dollar in February 2008.
It began unraveling when Lehman Brothers collapsed later that year, triggering the last global financial crisis, and struck its lowest level of 52.20 rupees to the US dollar on March 2, 2009, when global stock markets dived.
Diminishing India’s appeal to foreign investors and piling pressure on the rupee have been a slew of government corruption scandals, accusations of “policy paralysis” and a worsening fiscal situation, with the administration overshooting borrowing targets for the second half of the year by 32 percent.
“On a bad day, one often wonders how it [India] functions at all, let alone how it evolved to be Asia’s second-fastest growing economy,” investment house CLSA Asia Pacific Markets said in a sharply worded critique of the government’s handling of the economy.
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