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Swiss bank UBS says the rupee could hit 56 to the dollar on the back of India’s severe deficit drag
The Indian rupee is currently at  Rs14.39 against the UAE dirham, with rising dollar demand from importers and a weak economy expanding an already wide fiscal deficit.

The rupee traded at Rs52.89 against the US dollar on Wednesday, a little lower than the 2012 low of Rs53.30 that it made on January 3, 2012.

While the rupee recovered some of its losses next month, rising to Rs48.60 against the US dollar by February 4, 2012 (Rs13.23 against Dh1), it has since lost 9 per cent in three months.

With global ratings agency Standard and Poor’s maintaining a negative outlook on the Indian economy, analysts maintain that the rupee could soon fall to Rs56 against $1, or Rs15.24 against the dirham.

According to Swiss investment bank UBS, the rupee could hit 56 to the dollar, which would mark a record low. The bank cited the prospect of slowing flows on the back of India’s “severe” deficit drag, the need to “repair” its balance sheet and regulatory ambiguity that has reached a “crisis point.”

“In these conditions, there is very little policy easing. So companies and government must now become more efficient if they want to retain/induce that extra dollar from overseas,” UBS economist Philip Wyatt said in a recent report.
Last month, UBS downgraded India’s shares to ‘neutral’ from ‘overweight’, saying China is a better bet.

Experts maintain that the ongoing policy paralysis at the central government level in India and a rising imports bill are factors that will continue to put pressure on the beleaguered rupee, which recently made a lifetime low of Rs14.62 versus the UAE dirham on December 15, 2011.

Further, India’s apex bank, Reserve Bank of India (RBI), which has in the past come to the rescue of the rupee whenever there have been sharp movements in exchange levels, is being seen as a passive onlooker this time around by traders, who believe that the RBI may be lacking the inclination and, more importantly, the firepower to make any substantial difference to rupee’s levels.

Global risk-aversion on the back of concerns that the Euro Zone could slip back into another recession are making international investors shy away from making any fresh investments in emerging markets such as India, leading to the rupee being one of the main under-performing currencies over the past month.

“Not much is likely to change in the near term. We do not expect RBI to intervene aggressively, but it will continue with its intervention strategy of only stepping in to curb excessive depreciation without defending a particular level,” Abheek Barua, chief economist of HDFC Bank, said in a note.