Indian rupee slides despite measures
CURRENCY BREACHES 72-MARK AND HITS AN INTRA-DAY LOW OF 72.69 AS DELHI’S RESPONSE FAILS TO IMPRESS MARKETS
The Indian rupee slipped further yesterday signalling that the government’s latest efforts to defend the falling currency since the beginning of this year have failed to impress the markets.
The currency once again breached the 72-mark to hit a low of 72.69 (intra-day) against the US dollar and closed at 19.72 against the dirham yesterday.
The rupee fell nearly 12 per cent year to date prompting the government and the central bank to take some short-term measures to stem the currency.
The government on Friday announced several steps to lift the rupee through better capital inflows and curbing of nonessential imports.
Dollar’s rise
It also pledged to stick to fiscal deficit targets. Strengthening of the US dollar in recent months and rising oil prices have contributed to the fast decline of the rupee this year.
The dollar has risen against a basket of major global currencies this year. A further lift in the dollar is anticipated as markets await news on the implementation of US tariffs on an additional $200 billion (Dh734 billion) of Chinese imports.
The latest US employment data showed unemployment rate is edging down to 3.8 per cent, matching an 18-year low.
As it stands, the priced-in probability of a fourth rate hike in 2018 stands at 61.4 per cent, ■ leaving room for an upshift in conviction to boost the dollar. Analysts say economic data is clearly pointing to more trouble for emerging markets currencies including the rupee in the weeks ahead.
“September has started with a bang with emerging market currencies, commodities and stocks all selling off. More fireworks could be on the way,” said Fawad Razaqzada, market analyst at Forex.com.
While a large number of external factors have been contributing to the weakness of the rupee, analysts said weak domestic economic fundamentals have dragged down investor confidence in the currency.
“Large current account deficits, high inflation, excessive external borrowing or over-valued exchange rates create a vulnerability that can be exposed when rising US interest rates create uncertainties over access to funding. This has been the story for many emerging markets crises in the past, where financial markets differentiated relatively efficiently,” Bank of Singapore said in a note.
The latest round of policy intervention by the government follows limited market intervention by the Reserve Bank of India (RBI). As of end of March, the total forex reserves of the RBI stood at $424 billion. By August, the amount had fallen to $400 billion.
Futile intervention
Latest data shows forex reserves have since fallen further indicating the RBI’s efforts to hold up the value of the rupee have been a futile exercise resulting in significant erosion of forex reserves.
Government policy measures announced last Friday aim to reduce current account deficits by curbing non-essential imports and encouraging exports.
The short-term impact of these measures, according to analysts will be limited as crude oil consists of nearly 30 per cent of total imports in the last (June) quarter with engineering goods 18 per cent, chemicals and related products 10 per cent that are key manufacturing inputs. Curbs on imports of these will hurt manufacturing, value addition and exports.
While items such as gold jewellery and electronics are likely to become targets for both quantitative and tariff restrictions to curb imports, these could trigger international accusations of protectionism.