Wednesday, August 28, 2013

Decoder: 10 reasons why rupee hit 68 today - Firstpost

The rupee is again on a free fall and hit a record low of 68.75 per dollar in the late morning trade on persistent dollar demand from banks and importers due to further fall in equity market amid rise in crude oil prices.

The rupee fell despite Finance Minister P Chidambaram's attempts to allay fears that the a highly expensive Food Security Bill may widen the fiscal deficit this year.

The rupee had last Friday pulled back from the 65 level, which improved sentiment in the stock market in tandem. However, the currency returned to the bearish territory today.

India, however, is not the only country whose currency is weakening. Other emerging markets like Brazil, Indonesia, Russia, Turkey and South Africa are also witnessing a huge currency volatility because of fears that US may end its quantitative easing by year-end.

Here are the reasons for the rupee hitting new record lows on a daily basis:



• The  fall in the rupee has been largely attributed to the sell off in all emerging market currencies, due to the concern that the US may resort to military action in Syria, according to Reuters. The Indonesian rupiah hit a fresh four-year low on corporate dollar demand. The Malaysian ringgit touched its lowest in more than three years on selling by foreigners, while the Thai baht hit a three-year low on capital outflows. The Philippine peso fell to its weakest in more than two and a half years as local stocks plunged, Reuters said.

• Another reason for the rupee's decline is the passage of Food Security Bill in the Lok Sabha yesterday. The cost of the implementation of the bill has been put at around Rs 1.3 lakh crore annually. There are fears that the bill may adversely impact the government's ability to rein in the fiscal deficit at targeted 4.8 percent of GDP for this year. Finance Minister P Chidambaram's assertion the execution of the scheme will not breach the red line on the deficit did little to calm the forex market. There are rumours that the RBI is likely to have intervened in the market to protect the rupee around 65.9 levels.

• Adding to the worries is the month-end dollar demand from importers. There is not enough supply of dollars so as to meet this demand. Usually, during the month-end importer dollar demand increases as they make payments.

• The freefall in the rupee started in May when the US Fed Chairman indicated that the US central bank may start tapering off its bond buying programme later this year as it expected a recovery in the economy there. Anticipating this, foreign investors are pulling out their money from India to invest it back in the US, which has resulted in a scarcity of dollars in India. This, again, is not India-specific. All emerging market currencies are witnessing a similar capital flight. US recovery is also boosting the dollar strength.

• However, the Indian currency has been the worst hit because of the outflows. Experts have attributed this to the concern about the wide current account deficit and slowing growth.

• The Indian authorities' firefighting has did more damage to the rupee than salvaging it. While the government has opened up sectors for foreign direct investment, the RBI has resorted to interest-rate defence of the currency. FDI measures are likely to be fruitful only over the long term, while RBI steps are seen largely as bandages that will be effective only for the short term. However, a large number of experts now feel that the government and the RBI have miserably failed in their efforts to stem the rupee slide.

• In order to arrest the volatility in the forex market, the RBI started tightening its monetary policy July 15. It signalled increase in short-term rates by hiking marginal standing facility rate by 200 basis points. On 23 July and 8 August, it followed up with further tightening measures. On 14 August, the RBI also restricted overseas direct investment by Indian individuals and corporates to $75,000 per year from $200,000 earlier. In reaction, the rupee hit 65 on 16 August as FIIs perceived this as a precursor to tightening screws on their capital too. Along with the rupee's decline interest rates kept going up. On 20 August, the RBI signaled a reversal of tightening policy. According to Macquarie, the Reserve Bank of India's measures sent confusing signals on monetary policy.

• Apart from opening up sectors to FDI, the government has also raised import taxes on gold and silver in an attempt to narrow the burgeoning current account deficit. The import duty on gold was hiked to a record 10 percent, the third such increase in eight months, while duty on silver was hiked from 6 percent to 10 percent. The excise duty on gold bars was hiked to 9 per cent from 7 percent. The hike in duties came after Chidambaram said the government was looking to contain gold imports at 850 tonnes this fiscal year, after imports of 950 tonnes last year. However, as Firstpost said earlier, Chidambaram may be forced to introduce more curbs on gold if the 850-tonne limit is to be adhered to.

• In its efforts to attract dollar funds into the country, the RBI also eased some of the rate limits for deposits targeted at non-resident Indians (NRIs), though that is also seen as unlikely to attract inflows in the near term given that NRI deposits have seen net withdrawals of $1.1 billion in May and June, according to DBS.

• On 24 August, the finance minister in a whirlwind tour to Mumbai met with top bankers and FIIs. He reportedly assured them that the rates will not be increased and steps to attract dollar funds will be announced soon.
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