Rupee may plunge further to 57.80 driven by domestic, global factors

MUMBAI: A confluence of adverse domestic and global factors is threatening to push the Indian rupee to historic lows, making the import of crude oil and coal more expensive and aggravating the problems of an economy already battered by decade-low growth and poor investments.

The currency breached the psychological level of 57 to the US dollar, making importers nervous. But the government and the Reserve Bank of India (RBI), which have made gold imports difficult to shore up the currency, appeared to be unmoved.

"There is no cause for alarm on the Indian rupee, and capital flows are strong," said Finance Minister P Chidambaram. "I think the rupee will stabilise and find its correct level," he said.

The flight of funds back to the US, where yields are rising, is weakening currencies across emerging markets, robbing India of the benefit of higher exports because of depreciation. Even China, which has an enormous trade surplus, unlike India that is suffering from high trade deficit, saw its currency yuan fall the most in a month.

"I think there is still some more weakness left to play out in the rupee," said Arvind Narayan, head of treasury at DBS.

"Despite record flows, the currency has remained weak and now with yields on US treasuries going up, foreign investors may start pulling out from here given the rising hedging costs," Narayan said.

An ET poll of economists and currency traders shows the Indian currency could depreciate to a low of 57.80 in the next few weeks. It fell 0.2% to 56.85 on Thursday. Its all-time low of 57.32 was on June 22, 2012, and some expect it to touch 60.

The rupee has fallen 5.3% since May while the worst hit among emerging markets was the South African rand, which lost 9%, Bloomberg data shows. But the slide is accelerating since the last week of May when Federal Reserve Chairman Ben Bernanke hinted at tapering the quantitative easing that has been flooding the global markets with US dollars since 2009.

While most emerging markets are witnessing a depreciation of their currencies due to fears of the Fed stopping bond purchases, India is also affected by its poor international trade.

"Authorities will do everything to see that volatility is minimised," said KC Chakrabarty, deputy governor at the Reserve Bank of India. "The issue is that if we have a current account deficit and fiscal deficit, the rupee has to orderly depreciate and if it doesn't depreciate orderly, sometime it would be depreciating disorderly."

Current account deficit - the excess of spending overseas than earnings - is at 6.7% of the gross domestic product as against the 2% favoured by Indian policymakers. To fund this deficit, partly blamed on the craze for gold, the country is at the mercy of global investors who have been lured in the recent past with liberal terms on debt purchases.

"Let's face it... in a situation where there is a large current account deficit, you don't expect the rupee to strengthen," said Montek Singh Ahluwalia, deputy chairman of the Planning Commission. "There is only one thing you can do, is try to contain the macro imbalances."

But the tide of overseas fund flows may be turning after record inflows of 1 lakh crore into equities and debt this year. Foreign institutional investors sold nearly 12,000 crore worth of debt in about two weeks as yields in the US are more attractive than Indian paper, factoring in hedging for currency fall.