RBI move fails to calm investor jitters as rupee dives to record low

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The Indian rupee, the worst performing Asian currency this year, plunged 2 percent to a record low of 64.52 to the dollar on Wednesday on heavy dollar demand from importers.
The Reserve Bank of India’s plans to inject Rs. 80 billion ($1.26 billion) into financial markets failed to calm investor jitters.
“What more can the central bank do to support the Indian rupee? I continue to believe that the rupee will not stabilize until the central bank takes more proactive steps to raise the import cover of FX reserves to 9-11 months from 7 months. This will likely require the issuance of either a bond or a sovereign bond,” John Sfakianakis, chief investment strategist at Masic in Saudi Arabia, told Arab News.
“Ideally goods imported over time from India should become cheaper but that is dependent on importers passing the lower price onto the consumer and the rupee staying low over time,” he said.
Since mid-July, the RBI has taken steps to tighten cash conditions, which have failed to support the rupee but sent bond yields surging, posing a fresh threat to an economy that grew at a decade-low 5 percent in the last fiscal year, Reuters reported.
Deutsche Bank said in a note on Wednesday that the rupee could slide to 70 in a month or so, although some revival is expected by the end of the year.
“Growth will likely slip to below 5 percent if the July 15/23 tightening measures persist into the busy season. Hence it’s expected to see further rupee weakness in the coming weeks,” Sfakianakis said.
With a record high current account deficit at 4.8 percent of GDP, India is especially vulnerable to funds moving away from emerging markets in anticipation of a winding back of the US Federal Reserve’s stimulus program.
However, Jarmo T. Kotilaine, a regional analyst, said: “A weaker rupee is naturally positive news for India in the sense that it will boost the competitiveness of Indian exports. This may lend some impetus to Indian trade with Saudi Arabia as well as potentially attracting more tourism.”
From the perspective of Saudi exports, he said this is likely to mean more challenging. Subsidies on hydrocarbons have been scaled back in India and the rupee equivalent of oil, etc., prices will increase. This may put pressure on retail prices and erode people’s purchasing power. Nonoil exports may be affected more directly.
“Of course, the impact of this volatility tends to be to an extent mitigated by hedging, etc., but in general the near-term effect should boost the competitiveness of Indian goods and erode that of Saudi goods in India,” Kotilaine said.
He added: “The longer-term impact will, of course, be influenced by the impact of the weaker currency on domestic inflation as well as possible policy responses to the depreciation.”
Kotilaine said one of the worries among emerging market investors is that the changing monetary conditions in the United States will curb the amount of liquidity that has been available for emerging market investments. The relative attractiveness of such investments would also be challenged by a smaller interest rate differential vis-a-vis the US economy which now seems to be gradually recovering. The key uncertainty at this point naturally involves the timing and scale of any exit strategy by the Fed and, in the absence of some clarity, there is a risk of investor overreactions.
He said the underlying value proposition offered by the emerging markets remains compelling but changing market conditions may require it to be reasserted. One possibility in the face of capital outflows is monetary tightening by emerging market banks, which would naturally have adverse implications for domestic growth. Another possibility is that there will be some effort to control capital flows, although this is something that many countries are still likely to be reluctant to exercise, except on a temporary basis. Doing so could potentially undermine some of the significant benefits achieved through global economic integration.
Kotilaine said: “But the fact that money may become harder to attract should also induce emerging markets to enhance their competitiveness through new reform initiatives, which should benefit both in terms of stimulating growth in general but also by appealing to foreign investors. Achieving this could well become the silver lining of the cloud of monetary policy uncertainty.”
However, the continuous fall of the Indian rupee against the US dollar is adding to the difficulties of the common and even not-so-common man in India, because the salaries are not increasing and keeping proper pace with the spiraling prices and the increasing cost of living, said S.M.H. Akbar, who has been in the Kingdom for close to three decades.
“The falling rupee falls and having fallen, falls again, and not a single leader in power is moved to stay its constant slide, which is likely to lead to a stage when gold will be cheaper than “gobi’ (cauliflower),” he added.
Akbar said the problem lies with a majority of leaders whose vision does not extend beyond the panchayat (village) or parliament election.
He added that unless the common man rises above being common — depending on others to deliver — and realizes his own worth, things will not change much.
In India, the country’s aam admi (common man) says as imports will become expensive due to the falling rupee, inflation will rise further and their day-to-day life will become more and more difficult with unchecked price-rise of both essential and not-so-essential items.
India’s import of oil and petroleum products will become more expensive and this will in turn affect the prices of diesel and petrol in particular. The rise in transport costs will have a spiraling effect on the general level of prices which are already very high. “Prices are already high and they will be higher as the rupee continues to fall. It seems sky is not the limit so far as India’s price-rise is concerned.” This reaction from a Mumbai construction worker is echoed by all across the nation.

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