Bloomberg News

Rupee Plunges to Record Prompting India’s RBI to Consider Action

November 30, 2011

Nov. 22 (Bloomberg) -- India’s rupee fell to a record prompting the central bank to say it’s weighing action to stem the decline.

The rupee declined 0.8 percent to 52.5638 per dollar as of 10:58 a.m. in Mumbai bringing its decline to 15 percent this year. The BSE India Sensitive Index of shares tumbled 21 percent as investors sold emerging market assets on concern the U.S. and Europe will struggle to curb deficits.

The rupee’s decline this year, the worst performance among Asia’s 10 most-traded currencies, is raising costs for companies including Hindustan Unilever Ltd. and Maruti Suzuki India Ltd. A further drop will also spur inflation in Asia’s third-largest economy and increase fuel subsidy costs in a nation that imports 80 percent of its fuel. Inflation has held above 9 percent for 11 consecutive months.

“It is now very difficult to look for reversal in rupee depreciation when the Indian economy is struggling with high inflation, low growth,” J. Moses Harding, executive vice president at IndusInd Bank Ltd. in Mumbai. “It is possible that rupee has shifted into a higher base of 51 per dollar with next objective at 54 to 56 per dollar.”

The currency dropped past the previous low of 52.18, touched on March 3, 2009. It earlier touched 52.7288, the weakest level since at least 1973 when data became available.

“There is impact on companies and it’s a problem,” Gokarn said. “But, any action we take now, if any, has to take into account the fact that these actions might have consequences further down the road.”

Higher Costs

Offshore investors pulled $1.7 billion from local equities since foreign holdings reached a record $104.4 billion in July, according to data from the market regulator.

“What will hurt more is that the depreciation has been so steep and sudden,” Maruti’s Chief Financial Officer Ajay Seth said in an interview yesterday. “Volatility in the rupee will be severe in the next three to six months” because of global economic concerns, he said.

Finance Minister Pranab Mukherjee raised the government’s borrowing target by 13 percent to a record 4.7 trillion rupees ($89 billion) in September, signaling the gap in public finances is widening as a slowing economy cuts revenue. Income was 37.2 percent of the annual target in the six months through September, compared with 58.4 percent achieved a year earlier, official data show.

The Reserve Bank of India cut the nation’s growth forecast to 7.6 percent from 8 percent, and the rupee’s slide inflated the import bill and pushed the trade shortfall to a 17-year high of $19.6 billion in October.

Current-Account Deficit

India’s current-account deficit could widen, from 2.6 percent of gross domestic product in the fiscal year through March 2011, if oil prices continue to push up the import bill, the central bank said last month. India’s current account, the broadest measure of trade and investment flows, showed a deficit of $14.1 billion in the three months through June, compared with a shortfall of $5.4 billion the previous quarter, according to central bank data.

Three-month offshore forwards traded at 53.61 to the dollar, compared with 53.05 yesterday. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars. CIMB Investment Bank’s Ramanathan predicts the rupee could drop to 54 a dollar before March 2012.

The government yesterday signaled the central bank may not sell dollars “aggressively” to stem the local currency’s depreciation as rupee-liquidity is tight.

Liquidity Squeeze

R. Gopalan, secretary of economic affairs at the finance ministry, said the central bank’s ability to intervene in the foreign-exchange market is “limited.” Banks borrowed 1.27 trillion rupees yesterday from the monetary authority’s overnight facility, the most since March, according to data from the central bank.

“The Reserve Bank of India’s ability to intervene is hampered by the squeeze in system liquidity,” IndusInd’s Harding wrote in a note yesterday. “Aggressive intervention by the RBI in the spot market will lead to higher call money rate.”

India’s call money rate, at which banks lend to each other overnight, was at 8.65 percent, 15 basis points, or 0.15 percentage point, more than the RBI’s main lending rate. The central bank has raised its repurchase rate 13 times since the start of 2010 to 8.5 percent to help cool persistent inflation.

--With assistance from Siddharth Philip in Mumbai. Editors: Andrew Janes, Arijit Ghosh

To contact the reporters on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net; Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net


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