What They Said: Indian Rupee Hits Record Low

Rajesh Kumar Singh/Associated Press An employee counting Indian currency at a bank in Allahabad, Uttar Pradesh, on May 16, 2012.

The rupee fell to a new low against the dollar on Monday, hitting 58 rupees per dollar at one point. The previous low was recorded in June 2012 at 57.33 rupees for a dollar.

While the sharp fall in the rupee was caused mainly by the strength in the United States currency, experts say that India was particularly affected because of its widening current account deficit, brought about by huge imports of crude oil and gold over the past year.

Reena Rohit, chief manager for non-agriculture commodities and currencies at Angel Commodities Broking: Monday’s opening in the domestic markets has triggered a sense of fear as the rupee plunged to a new all-time low of 57.767, depreciating over 1.2 percent within hours of opening. Extreme weakness in the rupee yet again highlights the microeconomic as well as macroeconomic concerns.

While microeconomic concerns are bending towards the current account deficit, gold imports and a general slow economic scenario, the macroeconomic factors that are affecting the rupee is the strength in the dollar index, which is being backed by expectations that the Federal Reserve would withdraw its bond-buying program, thereby creating a favorable condition for the dollar index. This in turn would lead to weakness in the rupee. Also, U.S. Treasury yields would look more attractive, and that too could see a pullback in investor flows in the nation. High capital inflows support appreciation in the rupee and vice versa.

Given the current complex macroeconomic happenings, one could take a view on the rupee with a depreciation bias. Although it has already weakened considerably, there are expectations of a further weakening trend, and a stronger dollar index would cause majority of the weakness.

Sajjid Z. Chinoy, economist at JP Morgan: This is not of India’s making over the last four, five days. Every emerging market has blared over the last week, but it is the emerging market current account deficit countries that have suffered the most. So India is right in the middle of the pack. South Africa has been the worst sufferer. If you look at Turkey, Brazil, Mexico, this is just a global phenomenon.

Ironically, just three weeks ago before this move started, there was for the first time a semblance of macroeconomic stability in India. Wholesale price index numbers were at a three-year low, consumer price index inflation was coming off and we found out that the fiscal consolidation last year was very impressive. All of that suggested more monetary easing.

However, given the bleeding in the rupee, the R.B.I. [Reserve Bank of India] will very much stay on hold. A June rate cut is very much off the table, and if things don’t stabilize, so will a July rate cut. The reasons for the rupee depreciation may not be very India-specific, but the consequences will be India-specific. This kind of move is bound to be inflationary. It is going to push up subsidies on the budget; it will affect corporate balance sheets.

Taimur Baig, chief economist for India, Indonesia and Singapore, global markets research, Deutsche Bank: We see the fundamentals for the rupee improving substantially in the second half of the year. The move today doesn’t change that outlook. The economy’s outlook is weak, and the currency will remain vulnerable to periodic policy setback and global factors. But the major sources of drag to the currency in recent years â€" high inflation and high current account deficit â€" are dissipating rapidly, and will help support the currency, in our view.

Samir Arora, fund manager at Helios Capital in Singapore: If we have the prospect of lower inflation and gold imports come off, then that’s good news for the rupee. We’re foreign investors in Indian markets so we watch the rupee very carefully, but we don’t think the fall in the rupee has crossed investors’ pain threshold yet.

Adarsh Sinha, head of Asia-Pacific G-10 currency research at Bank of America Merrill Lynch: The problem for the rupee is that India is one of the few countries in Asia with a current account deficit, so when you see capital outflows, the rupee and Indonesian rupiah tend to be vulnerable. In an environment where markets are worried about an end to Q.E. [quantitative easing] and a rise in global bond yields, unfortunately the rupee will be vulnerable.

Raghuram Rajan, chief economic adviser to the Indian government: India has a large current account deficit, and currencies of emerging markets with large current account deficits have depreciated more. This could be temporary phenomenon. But again let me reiterate: the government is not supportive of the weakening of the rupee, and we would like more stability.

Arvind Mayaram, economic affairs secretary: If you see weakening of all currencies vis-à-vis dollar, the rupee is also not unaffected in that sense. But I think this panic in the market is unwarranted. I think this will settle down in a while. We should not worry, but we are watching the situation closely.

Dipen Shah, head of private client group research at Kotak Securities: Markets were volatile today but ended the day in the negative, dragged down by concerns on the rupee. The European markets opened lower before recovering. The rupee made new lifetime lows in the morning and traded near the 58/USD levels on continuing concerns about the current account deficit and reversal in foreign institutional investor (FII) flows.

FII’s have turned net sellers in equities over the past few sessions. In the last few days, the debt market has also seen outflows from FII’s, which further pressurizes the rupee. The rupee movement will be the focus area in the near term at least. The government has taken steps to reduce gold imports, and after a spike in May, gold import volumes may come down, providing some support to the rupee.