THE DESCENT OFMONEY

Higher inflation looms and corporate profits come under pressure as the rupee threatens to touch 60 to a dollar

ously anticipated. One of the major causes behind the rupee’s fall is the ‘ sentiment’ in the market. “There is increasing risk- aversion. With the end of a long period of earning money, people are getting back from risk, and pulling out dollars,” says Jamal Mecklai, CEO at Mecklai Financial. “India does not present a management which is in charge. The negative sentiment is now at its highest.”

The rising current account deficit is another factor. India’s current account deficit— its imports of goods and services are more than its exports— is estimated to be around 5 per cent of the gross domestic product ( GDP) in 2012- 13, compared with the previous year’s 4.2 per cent. The gap had widened to a record 6.7 per cent of GDP in the October- December quarter.

The Government had attempted to control the current account deficit by targeting gold imports by way of raising import duty from 6 per cent to 8 per cent. But this hasn’t helped. “People will continue buying gold, since they need it. What the Government should instead focus on is bringing the vast amount of idle gold into the market.” Of the 800- 1,000 tonnes of gold import, 40 per cent is jewellery while the rest is investment, he says.

According to a research note from Care Ratings, a change in foreign exchange ( forex) reserves is a fundamental driver of the rupee right now. A decline in forex reserves results in weakening of the currency. India’s foreign currency assets, after increasing in the months of March and April,