Rupee scalded as dollar turns hot

The recent steep depreciation of the rupee has been in sharp focus. Importers and the Government are increasingly worried about the escalating cost of imports, including crude oil, adding to the inflation headache. The hike in the price of petrol on September 15, for instance, has been attributed to, among other factors, on the weakness in the rupee. The INR has shed almost 7.5 per cent vis-à-vis the US dollar over the last month, with the decline gaining momentum over the past week and fortnight (down 4.6 per cent and 6.2 per cent respectively). Since the beginning of this calendar, the rupee has ceded a substantial 10.6 per cent against the dollar, with the RBI adopting a seemingly laissez faire policy with regard to exchange rate movements.

On Friday, the INR dipped to within kissing distance (49.89) of the psychologically crucial level of Rs 50 a dollar, before regaining some lost ground to finally settle at 49.43. This was a tad higher than Thursday's two-year low of 49.58. The mild gain is being attributed to the RBI finally intervening and selling dollars to halt, what is being seen as, a free fall in the rupee. The last time, the INR weakened to these levels was during the gloom-and-doom days of the late 2008 and early 2009 when the all-times low of Rs 51.97 a dollar was touched.

Risk aversion

The rupee's current travails are being attributed to a dollar squeeze in the markets due to a ‘flight to safety' by global money, a lot of which originates in the US. With talks of a double-dip recession in the US and Europe gaining ground, and indicators from China signalling signs of a slowdown, ‘risk aversion' seems to be thick in the air and has resulted in most global markets tanking in recent days. The original ‘safe haven', gold, also does not seem to be on the favoured list, given its sharp run-up over the past few months. It seems that investors are now choosing to book gains, where available, and park their money in perceived safe pockets such as the USD. Also, fears of the debt-crisis overwhelming Europe has worked in favour of the USD, with the greenback gaining more than 6 per cent against the Euro over the last month. However, closer home, the sharp fall in the INR has meant that it has lost vis-à-vis the Euro too, with a dip of 3.4 per cent over the last fortnight. As on Friday, a Euro yielded Rs 66.50, up from Rs 64.34 on September 9.

What could further complicate the picture is that India runs a significantly high current account deficit, with the value of imports exceeding exports. When times are good, capital inflows including substantial contribution from foreign institutional investors (FIIs) on the bourses help bridge the gap and support the rupee. However, a sharp deterioration in the global economic confidence could accelerate capital outflows from India, and this could put further pressure on the rupee. It also does not help that a weakening rupee erodes the profits on investments made by FIIs, and provides an added incentive to them to offload holdings. There is thus the risk of a weak rupee and FII outflows feeding on each other.

Long way down

From a historical perspective, the rupee has indeed come (down) a long way. Data from Bloomberg shows that the rupee has fallen from a maximum of 9.35 a dollar in the 1970s, to 18.2 in the 1980s, to 46.87 in the 1990s, to 51.97 in 2009. While the past need not be an indicator of the future, global economic jitters could mean that the rupee could head further down the slippery path.

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