The rupee breached the low of 61.21 this week and touched 61.80, a record low. This, despite all measures taken by the central bank and other regulators to contain the surging rupee.

The rupee’s outlook for the near future looks bleak and it will not be surprising to see the rupee trade in the 65-70 levels in the coming months.

There are definite reasons for the rupee to trade around these levels (although we might see some corrections in the near-term). India is a net importer i.e. India’s import bill is always higher than its exports bill resulting in higher current account deficit (CAD) and this has resulted from cumulative action over the last few years. There is no short-term solution to contain CAD and its correction is going to take a couple of years if we start taking measures from now.

Apart from high CAD, another important factor looming ahead is repayment of India’s external debt which is close to $ 390 billion out of which almost 44 per cent or $172 billion is scheduled for repayment or maturity by March 2014. Repaying this external debt will result in more demand for the dollar and will thus weaken the rupee further to the levels mentioned above. Let's assume that the Government and corporates who have piled up huge external debt are successful in postponing few of them. Even then quite a large portion of the $172-billion has to be repaid by March 2014. This will definitely create huge pressure on the rupee.

The Reserve Bank of India (RBI) has done almost everything that it could do to curb volatility and squeeze liquidity, even hurting the economic growth of the country just to contain the rupee. Currently there is not much ammunition left with RBI to contain the rupee’s slide due to limited forex reserves.

RBI’s intervention itself is misguided as it makes foreign institutional investors and other participants in the currency market feel uncomfortable and they tend to exit their positions in the Indian market.

Pressure on RBI

This creates more pressure on RBI to intervene again thus resulting in more demand for dollars which weakens the rupee further. Intervention is never a solution and is not a means that should be used by the central bank. RBI’s focus should be on inflation, and not on defending the currency.

This will help a lot of other factors to get streamlined and in the process if the rupee falls and finds a new level so be it.

There is some light at the end of the tunnel. With economic revival stories coming from the US it will be interesting to see Federal Reserve's actions on tampering with the cheap liquidity it made available over the last couple of years. With speculation almost out of the markets because of RBI’s measures, currently there is genuine demand for dollars and that is effecting the rupee. Also with the relaxation of foreign direct investment norms on various sectors, , we will definitely see funds coming into the Indian markets, though not immediately which will provide some cushion to the falling rupee. Non-Resident Indian bonds too is a good option but there is some reluctance at the Government’s end to float it immediately.

Late Thursday evening, the RBI announced that it will auction Rs 22,000 crore of government cash management bills every Monday, (although it has not specified for how many weeks the sales would last) to drain cash from the system to support the rupee. Although this is not a very encouraging step, it will aid the rupee in the near-term and help it to consolidate further.

The author is Regional Director, Alpari Financial Services (India). The views are personal

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