Rupee meltdown revives the macro worries

The rupee, which has been falling to fresh lows over the past two weeks, broke past the key 60 per dollar level on Wednesday.

Economists at Standard Chartered Bank said further depreciation will offset the recent positive developments on the inflation and twin deficit fronts.

“We are now concerned that rupee weakness may reverse some of these improvements. Our estimates show that a weaker rupee can add to inflationary pressure, widen the fiscal deficit and slow capital inflows, without having a positive effect on the current account deficit,” said Samiran Chakraborty and Anubhuti Sahay, economists at Standard Chartered Bank.

When the rupee suffered a similar slide in December 2011, the Reserve Bank of India (RBI) was prompt to announce a slew of measures for both short-term as well as medium-term impact, which kept the currency afloat for the following few months.

“Policy makers have not announced similar measures this time (except for restrictions on gold imports), although the RBI might have intervened,” they said.

They added that the measures to incentivise short-term capital inflows, particularly debt inflows, might not be successful at the moment and could even be counter-productive.

Despite improvement in domestic economic indicators, rupee has
suffered the worst compared with other emerging market currencies since the start of May. The rise in dollar demand following indications of quantitative easing pullback by the US Federal Reserve, has been the major contributor.

Depreciation typically helps Indian exporters, but a sharp fall does not.

Som Mittal, president of Nasscom said the IT industry would like the rupee to be stable for the sake of pricing in long-term contracts. “The rise in energy costs and inflation adds further pressure-even from an exports perspective,” said Mittal.

Rupee is expected to fall further if the government or the RBI do not intervene in a big way. “The fact that the currency has crossed the psychological mark of 60 per dollar, shows that the situation may not be under the control of the central bank and it would rather move on account of global developments,” said Reena Rohit, chief manager-currency research at Angel Broking.