Indian Rupee down 14% in August

On Thursday, the Indian rupee officially became the world’s worst performing currency, plunging to new historic lows against the greenback.

The emerging markets currency fell to Rs69.06 against the US dollar at 5pm UAE time (1pm GMT) on August 28, 2013, and Rs18.80 against the UAE dirham, inking yet another all-time low and sinking the country deeper into a balance-of-payment crisis.

The latest decline pushed the rupee down by 14 per cent in just the month of August (so far) and more than 26 per cent since the beginning of this year.

The rupee has, in fact, lost almost three-fifths of its value (57 per cent) in a little over two years, and has now reached levels unthinkable as late as just a few weeks ago.

Besides the world’s worst performing currency, India now boasts of the world’s third largest (and worsening) current account deficit, which stood at 4.9 per cent of its GDP in calendar 2013.

India’s $98 billion current account deficit in real terms is better (relatively speaking) than only the US, who has the luxury of printing the world’s reserve currency at will, and the UK, whose $106 billion deficit is only marginally worse than India’s but whose GDP is 33 per cent bigger than India’s.

A number of internal and external factors are being cited as reasons for the Indian currency’s woes, with Finance Minister P. Chidambaram even suggesting on Tuesday that the country’s former finance minister (and current President) Pranab Mukherjee’s policies were responsible for the financial mess that India finds itself in today.

Nevertheless, the recent deepening of the Syria crisis, which has led to a spike in the price of oil, is straining the Indian economy of precious foreign exchange. The Syrian crisis and fears of an escalating conflict in the Middle East led to global oil prices reaching their highest level since May 2011, with a barrel of WTI surging to $112.24 yesterday. Brent futures too climbed to a six-month high, reaching $117.34 a barrel.

India needs to import about 3 million barrels of oil every day, which means it needs to spend an average $345 million every day to cope with its internal demand for crude by industry and consumers.

Add to that Indians’ penchant for gold, which refuses to die down despite authorities imposing a punishing 10 per cent import duty on the precious metal, as well as investment demand by corporates and individuals, and it becomes clear that India needs half a billion dollars every day just to cope up with demand from oil and gold importers apart from investment demand.

Then there are other goods and services that India needs to import – including precious stones, fuel for nuclear reactors, electrical machinery and equipment, fertilisers, chemicals, iron and steel, etc. etc.

India’s imports during April 2011 to March 2012 period amounted to $489.3 billion, and it’s reckoned that imports grew to about $495bn last year.

This year, with the plunge in the value of the rupee making imports dearer, it will be safe to assume that imports will amount to more than $500 billion.

This means that India will need to export $500 billion worth of goods to maintain trade parity. Unfortunately, India’s exports are estimated to have reached just $300 billion for the year ended March 2013, leaving a gaping hole of approximately $200 billion, which is the country’s trade deficit.
Indeed, while India should continue to focus on reducing imports, the focus of its A-team should immediately shift to boosting exports and encouraging dollar inflows.

EARLIER STORIES: WEDNESDAY

The beleaguered Indian rupee is in the midst of a collapse, and has regained the notorious title of the world’s worst performing currency this year.

The rupee declined to Rs18.65 against the UAE dirham, and Rs68.58 against the US dollar at 9am UAE time (5am GMT) on Wednesday, August 28, 2013, marking yet another historic low for the emerging market currency.

The currency is now down a massive 55 per cent in just a little over two years, with the rupee trading at Rs11.99 against Dh1 on July 29, 2011. With this latest decline, the rupee is down more than 25 per cent year-to-date in 2013, and has officially taken over the title of the world’s worst performing currency in 2013 from the South African rand, which is now down 23.75 per cent YTD.

The latest nail in the rupee’s casket was drilled yesterday by the Indian parliament, which approved an ill-afforded and ill-timed $20 billion food security bill at a time when the country’s fiscal deficit is ballooning out of control.

Palaniappan Chidambaram, the country’s finance minister, made another attempt to salvage the declining rupee yesterday by offering his insights into the rupee’s ‘true’ rate by suggesting that it had overshot its true level and that country was one of several emerging markets facing such pressures.

International and institutional investors of course have long stopped paying any heed to such lip-service when even concrete steps taken by the government – such as hiking the retail price of fuel, implementing strict capital controls on Indian firms, and supplementing gold import duties – have failed to arrest the rupee’s slide.

Chidambaram still maintains that the Indian government will do all it can to stick to its target of reining in the fiscal deficit to 4.8 per cent of the gross domestic product – even after spending a bomb on the food security programme.

The incoming Reserve Bank of India (RBI) governor Raghuram Rajan, who is set to take over the reins of the RBI next month from incumbent D. Subbarao, has already said that he doesn’t have a magic wand to set things right in the short term.

Global investment banks such as Deutsche Bank and UBS reckoned earlier this month that the rupee could slump to Rs70 against the US dollar by the end of this year. That prediction seems to be in a hurry to come true, with the rupee declining by 13.22 per cent since the beginning of August.

Of course, there are other emerging market currencies that have been victims of the most recent global currency rout, including the Turkish lira, the Brazilian real and the Mexican peso, but none of them have been as badly damaged as the rupee, highlighting the economic woes of a country that was not too long back being touted as one of the two economic engines (along with China) to bail the world out of a prolonged recession.

India is now making desperate attempts – like stalling the imports of flat-screen TVs by individual air passengers – to stave off a balance-of-payments crisis (which is responsible for the weakening of its currency), but clearly, it needs do much more to send the right signals to the international investment community.

A number of analysts are suggesting that instead of trying to rein in expenditure by hiking gold import duty etc., the country should take steps to increase its income by further boosting exports. The weakest ever rupee is definitely good news for the country’s exports, as it is for incoming remittances by non-resident Indians (NRIs).

India is the world’s largest recipient of remittances by its citizens who live and work outside the country, with NRIs remitting almost $70 billion in 2012. This year, experts reckon that figure could go up to $85 billion, with Indian expats in the Gulf alone remitting up to an estimated $51 billion in 2013.

Will that be sufficient to buoy the rupee? We’ll find out.

TUESDAY REPORT:

The Indian rupee plunged dramatically on Tuesday, August 27, slumping 4.66 per cent in a matter of a few hours to yet another historic low, of Rs18.30 against the UAE dirham (Rs67.23 against the US dollar), baring the rout in the currency, which is now down more than 23 per cent since the beginning of the year.

In fact, the rupee has lost more than 25 per cent of its value in less than four months, since May 2, 2013, when it traded at Rs14.61 against the UAE dirham. With this latest slump, the rupee has lost more than half its worth (52.62 per cent) in 25 months. The rupee traded for Rs11.99 against Dh1 on July 29, 2011, and within two years, the emerging market currency has slid to a record Rs18.30 against Dh1 today.

The decline came after the Indian Parliament approved a $20-billion food security bill, sending a clear signal to international investors that the country's government is not serious about controlling the ballooning deficit and, ahead of next year's general elections, will continue to take populist measures at the expense of the country's economic health. 

Mirroring the global rout in equities this morning, India's benchmark BSE Sensex index slumped by more than 3 per cent today and closed at 17,968 points, a slump of almost 600 points, and down 3.2 per cent.

As the Indian rupee continues to weaken to record levels against the US dollar and dollar-linked currencies such as the UAE dirham, non-resident Indians (NRIs) in the UAE and across the Gulf region are seen binge-borrowing in their host countries to remit record sums of money to their home country.

India currently finds itself in an unenviable situation, caught as it is between the unholy trinity of slowing economic growth, a mounting fiscal deficit, and a plunging currency. Most international analysts believe it is becoming increasingly tough for the emerging market giant to meet its balance of payments obligations, which is leading to a loss of faith in its currency.

After a semblance of recovery late last week, the rupee once again began its southward journey this week, slumping below the Rs17.50-mark vs. Dh1 (Rs64.31 vs. $1) yesterday and breaching the Rs18-mark today as month-end dollar demand weighs heavily on the emerging market currency, besides a fundamentally weak Indian economy.

The rupee breached another significant milestone today on its way down, slumping below the Rs67-mark against the greenback and landing at Rs67.23 vs. $1 (Rs18.30 vs. Dh1) at 4.50pm UAE time (12.50pm GMT).

This continuing decline has led to a surge in remittances by Indians based in the UAE and across the Gulf, with UAE Exchange, one of the largest remittance houses in the world, estimating the surge at 6 per cent just in the past two months.

“The continuous dipping of INR has resulted in a 6 per cent increase in remittances over the past two months,” Y Sudhir Kumar Shetty, COO – Global Operations, UAE Exchange, told Emirates 24|7.

The Indian rupee continues to make and break new records on a daily basis, with the beleaguered currency once again slumping to new lows in early trade today, and banks in the country are luring expats with "low personal loan rates" for remitting and investing in India.

"Avail a personal loan at low rates & invest in NRE Fixed Deposit at our partner banks in India at higher interest rates," reads a text message we received just this morning, encouraging us to leverage the arbitrage opportunity arising out of higher interest rates in India than here in the UAE.

Additionally, a number of Indian expats will be eyeing the real estate opportunity back home, with properties becoming that much cheaper in dirham/dollar terms with a plunging rupee.

India is already the world’s largest recipient of remittances by its overseas nationals, with NRIs remitting $69 billion in 2012.

With the ongoing rupee weakness, that number is set to surge in 2013, says Shetty.

“The first half of 2013 witnessed a growth of 12-15 per cent in remittances, when compared with that of 2012,” he says.

“The further weakening of rupee will make remittance flow grow by 15-20 per cent in the coming months. So the expected remittance flow towards India in 2013 will be around $84-85 billion, of which 60 per cent is expected from the GCC,” he reckons.

As NRIs continue to borrow in dirhams and dinars across the Gulf to remit money home, Shetty has a word of caution for Indian expats.

“The trend of borrowing money is there for the last two to three years. People are using different means to borrow maximum money to send back home – be it bank loans, credit card withdrawals, savings etc. which leads to over leverage of individuals, which is a very disturbing trend,” he says.

The currency’s slide continues even as the central bank, the Reserve Bank of India (RBI), has taken a number of fresh measures to pump the country’s banking system with fresh liquidity in order to avoid a cash-crunch crisis.

Importers in the country have been struggling to cope with increased demand for US dollars as they need to spend more rupees per greenback for bringing in oil and other essential goods into the country.

In addition, the heightened probability of the US Federal Reserve withdrawing its bond-buying programme in a phased manner starting next month is also weighing heavily on the rupee as well as other emerging market currencies, some of whom have in the past benefitted from America’s dollar-printing binge.

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