Indian rupee at fresh lifetime low

Published Wednesday, July 31, 2013

By Vicky Kapur

Despite a number of measures undertaken by Indian authorities, the beleaguered Indian rupee has shown not much signs of life, and has continued on a downward spiral in the past two years.

Exactly a couple of years ago, on August 2, 2011, the Indian rupee traded at Rs11.99 against Dh1 (Rs44 against $1).

Today, July 31, 2013, the rupee traded at Rs16.654 vs. Dh1 (Rs61.166 against $1) at 10.30am UAE time (06:30GMT), a whisker over its previous lifetime low of Rs16.63 vs. Dh1 (Rs61.09 against $1), made earlier this month on July 8, 2013.

That’s a decline of almost 40 per cent in 24 months, and it isn’t over yet.

Reserve Bank of India (RBI) Governor Duvvuri Subbarao yesterday said the country is caught in a classic ‘impossible trinity’ trilemma involving the currency, economic growth and inflation.

“India is currently caught in a classic ‘impossible trinity’ trilemma whereby we are having to forfeit some monetary policy discretion to address external sector concerns,” Subbarao said, adding that, had the currency been stable, the growth and inflation balance would have allowed for sticking with a monetary easing stance.

Describing India’s external sector as the “biggest threat” to its macroeconomic stability, the country’s apex bank yesterday sounded the alarm-bells and urged the government to take immediate steps to narrow the current account deficit, which has hurt the rupee and overall growth.

“The biggest risk to the macroeconomic outlook stems from the external sector,” Reserve Bank of India (RBI) Governor Duvvuri Subbarao said yesterday while unveiling the first quarter review of the monetary policy.

India’s current account deficit has remained well above the sustainable level of 2.5 per cent of GDP for three years in a row, and has widened to an all-time high of 4.8 per cent of GDP in fiscal 2013. The RBI said that the widened deficit has brought the external payments situation under increased stress, reflecting rising external indebtedness and the attendant burden of servicing of external liabilities.

The RBI left key policy rates unchanged at 7.5 per cent and cut the GDP growth estimate for this fiscal to 5.5 per cent from 5.7 per cent.

The recent spate of fresh lifetime lows for the rupee in June and July prompted the country’s central bank and India’s Finance Ministry to take a number of measures to stem the rot, including hiking short-term interest rates, loading up further on gold import duties, and hiking the price of petrol.

Subbarao has already hiked two interest rates in July, announced new restrictions on daily fund injections into the banking system, and tightened the banks’ reserve ratios, curbing rupee supply to stem the currency’s plunge.

The measures worked but only for about a week to 10 days, it seems.

Yesterday, in the last scheduled monetary-policy review due before his term ends in September, Subbarao announced that the RBI would keep the benchmark repurchase rate at 7.25 per cent.

“The priority for monetary policy now is to restore stability in the currency market so that macro-financial conditions remain supportive of growth,” the Reserve Bank said in an economic review before yesterday’s rate decision in Mumbai.

Such a strategy will work only if reinforced by “structural reforms” to reduce the deficit and spur investment, it said.

Unfortunately, the steps that the RBI and the Indian Finance Ministry have taken to stem the rupee’s rot are bad for the economy in the long term, and the market sees that. With market participants quick to understand that what’s bad for the economy cannot be good for the rupee, the RBI’s dilemma only gets more complicated.

“Policy initiatives were taken in mid-July to address exchange rate volatility so that it does not risk macroeconomic stability and growth sustainability,” the RBI noted, but acknowledged that they were, at best, stop-gap measures.

The recent “liquidity tightening measures” provide “at best some breathing time,” it said.

Unfortunately, coalition politics and impending general elections in May 2014 mean that the Indian government is, practically, in no position to make the masses swallow the bitter pill of more expensive fuel (and therefore everything else that needs to be transported), higher duties and lower spending power required to buy more time for structural reforms to work.

Most analysts expect the rupee to hit a fresh lifetime low again.

To make matters worse for India, the US Federal Reserve’s policy review this week might hint afresh at a tapering off of the fiscal stimulus. If that happens, expect the rupee to make not just one but multiple lifetime lows in successive sessions.

Expat Indians might want to get ready to remit in bulk to take advantage of the exchange rate. And unless the government announces some really tough decisions soon (the Finance Minister is expected to hold a meeting today), expect this windfall to last another few months.

(Home page image courtesy Shutterstock)

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