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Expert views on the chances of the beleaguered rupee falling even further
The Indian rupee has become a much-maligned currency of late, making six lifetime lows in as many sessions.

The rupee once again made fresh lows this morning, trading at Rs15.198 against ther UAE dirham (Rs55.81 against $1) at 8.45am UAE time (4.45am GMT) on Wednesday, May 23, 2012. With the currency losing more than 25 per cent of its worth in less than 10 months, there is no dearth of experts claiming that the rupee is bound to decline further.

Is this the end of the road for the rupee, or will it bounce back with a vengeance?

The rupee is currently trading close to Rs56 vs. the US dollar (approximately Rs15.20 against the UAE dirham), and many analysts are not ruling out the rupee slumping to 60 against the US dollar (Rs16.33 vs. the UAE dirham) in the short term.

“The risks that the rupee prints 60 in the first half of 2012 can’t be ruled out,” Sailesh K. Jha, the Singapore-based head of Asia markets strategy at Skandinaviska Enskilda Banken AB, said in an earlier report on the outlook for the rupee.

“The rupee could move between 56 and 58 per dollar in the days to come,” said Ashish Vaidya, executive director, trading, UBS. “How rupee is behaving is in line with the weak Indian macros. There has been no practical policy making to address the structural issues relating to current account as well as economic growth.”

The yawning deficit is the primary fundamental trigger for a weak rupee. “Large trade deficits will remain on back of strong imports of oil, gold and consumer goods. This will outweigh the impact of a recovery in exports of processed crude-oil products, chemicals and machinery exports,” Jha said in the report.

“From a capital flows perspective we anticipate continued net outflows from the equity market into the first half as uncertainty on the outlook for India’s growth, inflation and macroeconomic policies lingers,” he said.

Appealing as the scenario of Indian rupee slumping to Rs16 against the dirham is from an Indian expat’s perspective, it is indeed a sorry state of affairs for their country of origin, which has to pay in dollars to import oil to meet four-fifths of its growing energy demand.

Looking at the pace with which the Indian rupee has lost currency (pun intended) in the past few months – it has deteriorated by more than 13 per cent in less than 15 weeks – prospects for a n weaker rupee loom in the horizon, considering that the critical reasons for its decline haven’t been addressed and in fact, can’t be addressed in a hurry.

While the Indian Finance Minister Pranab Mukherjee would like to wish away the weakness as being influenced by a stronger US dollar and Europe’s worsening debt crisis, the fact of the matter remains that if those were the only reasons, or even the primary reasons, the rupee would have fallen in tandem with the rest of the emerging market currencies. It hasn’t.

It’s declined against some of the other BRIC nations’ currencies in the past 15 weeks, falling 13 per cent against the Chinese Yuan Renminbi and 10.6 per cent against the Russian Ruble. What’s more, in stark contrast to what the Indian FM would have us believe, the rupee has declined against the euro zone’s own currency too, slumping more than 10 per cent against the euro in the 15-week period. So it’s clearly just not the euro zone’s woes impacting it that badly.

Subir Gokarn, Deputy Governor of India’s central bank, was more forthcoming when he acknowledged yesterday that the rupee’s weakness is being driven by a large trade deficit and high oil prices. But even that is just half the story. The remaining part of the movie about the rupee’s sickness features a policy paralysis at the central government level, a penchant among Indians for consuming gold at whatever price it comes, and years of high-growth economic development that is now overheating.

All this put together signifies a further decline in the short-term (next six months) fortunes of the rupee, despite the RBI and the Indian Finance Ministry making high-pitched noises about undertaking further steps to stabilise the rot in the rupee.

The fact of the matter remains that the malaise afflicting the Indian currency is equivalent to gangrene, and the steps that the RBI and the Finance Ministry are taking are akin to applying Band-Aid on the wound. Nothing short of a surgery – major policy decisions to reform India’s economy and oipen up key sectors such as retail – will work.

But with a fractured mandate that the ruling Congress government has, it is well-nigh impossible to get such reforms underway, at least not until the next elections, which fall due in 2014.

The current situation India finds itself is also because a large number of foreign investors developed cold feet after the government announced, earlier this year, that it will be increasing taxes on foreign institutions operating in the country on a retrospective basis, i.e., such investors will now have to pay additional taxes for yesteryears as well.

That was enough for a mass exodus of foreign capital from the country, which has also led to a slump in the country’s equity markets, while fresh capital inflows have slowed down to a trickle. “Capital flows are not matching [dollar demand for oil]," Gokarn said yesterday, after the rupee breached the 55-level against the US dollar. “Ultimately, capital flows are going to be the main determinant of how the currency behaves.”