Rupee to stay volatile on uncertain economic outlook

December 18th, 2011 - 5:35 pm ICT by IANS  

Pranab Mukherjee New Delhi, Dec 18 (IANS) The Indian rupee, that has weakened almost 16 percent against the US dollar since the beginning of the year, is likely to remain volatile in the coming months due to uncertain domestic and global economic outlook, say analysts.

The partially convertible rupee got battered in the last one month, hitting a record low of 54.30 against a dollar Dec 15, almost 24 percent down from the year’s high of 43.85 recorded July 27. It has been the worst performing among Asian currencies.

“In the short-term, say, the next five to eight weeks, the rupee will remain volatile with negative bias,” said Sanjeev Krishan, executive director at PricewaterhouseCoopers (PwC).

He said the rupee was likely to decline further and hit a new low if economic data remained weak and major policy concerns affecting industry and economic growth were not addressed.

“Currently, we don’t see any pull back trigger. If there is improvement in economic numbers and some good news from the policy-making front, then the things can reverse,” Krishan told IANS.

The rupee depreciated sharply in the last two weeks mainly because of increased demand for the greenback from importers and investors, and outflow of capital from Indian equities market amid concerns about slowing growth, high inflation, widening deficit and inability of the government to push forward key reforms.

Overseas investors are the net sellers in the Indian equities market this year. After pumping in almost $29 billion in 2010, foreign investors have cut holdings of Indian shares by $353 million so far in 2011.

Top economic policy makers, including Finance Minister Pranab Mukherjee, have expressed concern over the rupee slide. “No finance minister will find it comfortable when rupee is declining,” Mukherjee told lawmakers last week.

However, Nobel laureate economist Amartya Sen does not share the pessimism. He said the depreciation in the value of the currency also benefited a section of the economy. So it should not be considered a disaster.

“From the point of view of some people a lower value of currency is a loss, from the point of view of many other people it is not, so you have to judge it,” Sen, a professor of economics at Harvard University, told IANS.

Sen pointed out that some countries like China were deliberately keeping their currencies undervalued to boost exports.

“Some countries are very keen on keeping their currency values down in order to be able to export easily. China has done extremely well out of it,” said Sen, adding India could also derive the same kind of benefit from the currency depreciation.

To curb the slide, the Reserve Bank of India intervened in the foreign currency market Thursday. The central bank has imposed restrictions on forward contracts and reduced the amount of foreign currency dealers could hold overnight. Forwards are agreements to buy or sell assets at a set price and date.

After the central bank’s move, the rupee rebounded almost two percent Friday, the last trading day of the week, from the record low of 54.30 hit in the previous day.

The central bank had also earlier intervened in the foreign currency markets by selling dollars from its reserves. India’s foreign exchange reserves stood at $306.77 billion for the week ended Dec 9.

The depreciation in the value of currency should make imports costlier and boost exports. However, the exporters are not enthused by the slide in the value of the rupee.

Ramu S. Deora, president of the Federation of Indian Export Organisations, said the rupee volatility was affecting exporters also because most of India’s exports, except commodities, are heavily dependent on imports of raw materials and complimentary items.

“Most of our exports are dependent on imports of some items. Like gems and jewellery is dependent on imports of gold, silver and stones. Similarly, exports of petroleum, chemical and engineering goods are also heavily dependent on imports of raw materials,” said Deora.

PwC’s Krishan said currency depreciation will have a negative impact on a majority of the people in the country because India was a net importer of goods.

India is dependent on imports to meet its growing energy demands. The country’s trade deficit is likely to rise above $150 billion in 2011-12 as compared to $94.6 billion in the previous year.

(Gyanendra Kumar Keshri can be contacted at gyanendra.k@ians.in)

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