The Indian Rupee touched a record low on Tuesday to Rs.61.70 to a dollar, surpassing its previous low of Rs. 61.21 on July 8th. The falling rupee will undoubtedly pressure Reserve Bank of India to take measures to reinforce the currency, which is 12.7 percent low since May as India is toiling to reduce its current account deficit.
Dealers informed that the rupee surged to Rs. 61.60 in afternoon trading on account of dollar sales by the Central Bank, according to a report from Reuters.
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Steps to strengthen the rupee
Reserve Bank of India (RBI) took steps to raise short term interest rates and reduce market liquidity on July 15, which had little impact on the falling rupee, with still significant liquidity in the market.
According to traders, the rupee will keep on falling unless Prime Minister Manmohan Singh takes corrective measures like reforms or raises debt abroad to bring in quick capital inflows.
Taking corrective measures such as raising money from Indians abroad or allowing public banks and companies to sell dollar debt will be expensive in the global scenario, which is at this time is not on the emerging markets’ side.
According to analysts, the government will resort to bringing cash into the country by raising capital abroad through bank deposits targeted at non-residents, or by selling sovereign bonds. India will have to pay 5 percent and 6 percent on domestic dollar deposits for 5 years if it wants to bring in cash from overseas.
“Investors’ negative sentiment has thrown rupee into the deep valley,” said Pramit Brahmbhat, CEO of Alpari Financial Services, an FX consultancy. The rupee is estimated to reach a low of Rs. 62 in the near term because of a huge current account deficit and weak fundamentals.
National elections are coming next May, which may make it difficult for the government to bring in reforms to improve the current account deficit, which was at 4.89 percent of gross domestic product last year.
Dariusz Kowalczyk, senior economist and strategist at Credit Agricole in Hong Kong, said that direct interventions and other measures are the only hope to curb the rupee downfall outside of fundamental reform, which does not look to be happening.
RBI also needs to drain cash
In the past two weeks, government spending has increased, along with New Delhi spending the remaining cash balance and borrowing from the Central bank, according to RBI weekly data, which is putting cash in the economy. Reserve Bank will also pay its annual dividend to the government, which comes to around 330 billion rupee this fiscal year.
Analysts feel that RBI will have to intervene to drain cash from the market with measures like a hike in banks’ cash reserve ratio etc.
Raghuram Rajan, India’s chief economic adviser who will replace Governor Duvvuri Subbarao on September 4, will surely have a huge task and expectations to fulfill.