Write Comment     |     E-Mail To a Friend     |     Facebook     |     Twitter     |     Print

At the beginning of 2012, the Indian rupee traded at Rs 53.10 to the US dollar. It then appreciated to Rs 48.60 in February 2012. It has slipped since then slipped to Rs 50.60.

Analysts say that the Indian rupee is likely to be vulnerable to external shocks and fall further.

Here are some pointers to factors that could influence the rupee direction:

• Current account deficit: High current account deficit raises the demand for foreign exchange. This exerts pressure on the rupee. The current account deficit occurs when a country’s imports are higher than exports. While payments such as foreign remittances, foreign aid also influence the final calculation, the deficit widens if imports surge. India’s trade deficit for the year to March 2012 is likely to touch $175-180 billion from an earlier estimate of $160 billion, according to government officials. For the quarter to December 2011, India’s current account deficit rose to $ 19.6 bn from $ 10.1 bn in the year ago period. Imports have surged sharply and exports have slowed. This means that the demand for US dollars remained high and is likely to stay high considering the sharp rise in oil prices. 

• Oil prices: International oil prices continue to rise and add pressure on the Indian current account deficit. The current account deficit occurs when a country’s imports are higher than exports. According to Credit Lyonnais Securities, a foreign brokerage, every $ 10 per barrel increase in the oil prices adds $ 10bn to the current account deficit. Since January 2012, oil prices have gained 13.5 per cent. The benchmark Brent Crude oil rose to $ 125 from $ 108 in January 2012. While the Indian crude oil import basket is a mix of expensive and crude oil, rise in international oil prices raises India’s import bill.

• Foreign capital flows: In 2012, Indian equity markets have received $ 13.5 billion in equity and debt flows. The initial rally in the rupee to February 2012 was on the back of strong flows. However, the rupee has not managed to hold on to gains despite taking in these flows. With Indian equity markets already outperforming the peer group across emerging markets, foreign institutional investors would be cautious bringing in more money. To add to that, there is a risk of money being pulled out due to general anti-avoidance tax rules or GAAR. Half of the foreign institutional money is routed through Mauritius. This could further increase the demand for US dollar.

• Government expenditure: A current account deficit is fine if the central government manages the fiscal deficit by putting a cap on the expenditure. The government borrowing programme announced last week shows no plan to cut expenditure. The government is looking to borrow 65 per cent of the full-year borrowing requirement by September 2012. Past record indicates that the government may exceed the limit by March 2013. This could weaken the macro-economic fundamentals further and puts India’s credit rating at risk, if one goes by notes from credit rating agencies. A higher fiscal deficit puts pressure on the currency as RBI has to print more money to fund it.

• RBI intervention unlikely: The Reserve Bank of India intervened in the currency market in December 2011 and January 2012 by selling US dollars and buying the rupee. It spent foreign exchange reserves to the tune of $ 7.8bn in December 2011 and $ 7.3 bn in 2012 to prop up the currency, according to CLSA. The brokerage does not believe that RBI could intervene now. The brokerage also highlights that analysts predict US dollar to strengthen going forward against major currencies. This could hurt the value of the rupee even further. CLSA predicts rupee to touch Rs 55 to US dollar by December 2012.