MUMBAI - The Indian rupee dived to an
historic low of 54.51 to the US dollar on May 16,
to continue its unexpected plight as one of Asia's
most ailing currencies in recent times - and
continuing a double-edged existence as both a
symptom of economic troubles and a doctor in
disguise.
Numerous factors, from widening
fiscal and trade deficits, inflation, investors
rejecting governmental policies, as well as the
euro debt crisis in Greece are being attributed to
the increasing demand for the dollar at the
expense of the rupee.
While Finance
Minister Pranab Mukherjee assured parliament on
May 16 that the "complex" situation in Europe had
affected Asian markets and the Indian rupee, his
somewhat strange policies have
also contributed to more
funds leaving India than entering it.
The
controversial general anti-avoidance rule (GAAR),
for instance, shocked multinationals in India with
its aim to retrospectively tax companies on
earlier investments. Britain's Vodafone was asked
for taxes for its purchase of the Hong Kong-based
Hutchison's cell phone business in India in 2007.
Mukherjee has suspended GAAR for a year,
but the backtracking has done little to boost
investor confidence in the government. The
currency of one of the world's fastest growing
economies is expected to sink to 56 to the dollar
later this year.
Significantly, Prime
Minister Manmohan Singh's government has not yet
pressed the panic button, and has not talked
crisis management. Manmohan and Mukherjee seem to
share an emerging feeling that the rupee's dive
could be a blessing in disguise: a humbler rupee,
for instance, would compel India to be a more
self-dependant and export-oriented economy.
"High inflation in the last two years has
eaten the competitiveness of the Indian exports
industry at a time when the global economy is
already experiencing lower demand," said D K
Aggarwal, chairman and managing director of
leading New Delhi-based brokerage firm SMC
Investments and Advisors Ltd. "This has resulted
in a huge rise in the trade deficit, more so with
a growth in imports due to rising consumption".
A depreciated currency would increase the
competitiveness of industry and help bridge the
trade deficit gap, Aggarwal said in an email to
Asia Times Online, although adding that "now we
believe even the government seems to be worried
about the falling rupee". More immediate
fallout could be bad news for those Indian
companies heavily linked to the US dollar. The
rapidly depreciating rupee could be a "death blow"
to those that have borrowed heavily from overseas
sources, said Jagannadham Thunuguntla, strategist
and head of research at SMC. The rupee has
depreciating by 22% since January 2011, from 44.67
to the dollar.
"During the calendar year
2011, Indian corporates raised about $30 billion
through External Commercial Borrowing (ECB)," said
Thunuguntla in his assessment of the rupee's
decline. "The 22% rupee depreciation translates
into an increased burden on the Indian companies
in repaying the ECBs. Such additional burden works
out to US$6.6 billion."
While it takes
much courage to sit still when the currency seems
to be in free fall, circumstances may quickly
limit the choices available to the government to
intervene. The Reserve Bank of India (RBI), the
usual knight in armor to defend the rupee, is fast
losing its shine from overwork at this particular
rescue act.
RBI intervention this week
helped the rupee claw back temporarily after
sinking to the "psychological low" of 54 to the
dollar, a situation it experienced last December.
But the central bank has acknowledged it cannot
continually dip into fast-depleting foreign
exchange reserves to steady the currency.
The latest RBI intervention came through
selling about $300 million through state-owned
banks to cool dollar purchase prices. The banking
regulator has already pitched about $20 billion
into the market since September 2011 to bolster a
currency that has been in the wrong side of 50
since November 2011.
Depleting forex
reserves reduce the chances of substantial future
RBI intervention, in a realization that
administering pain killers cannot cure longtime
ailments. India's forex reserves dipped to $293.17
billion, as of May 4, 2012, from $309.5 billion a
year earlier, and resulted in questions over what
best to do with surplus reserves being dropped in
favor of concern there will be barely enough
dollars to fund imports for a year.
The
RBI is resorting to other measures - some say
overdue - such as issuing a circular on May 10
asking exporters to immediately convert a minimum
of 50% of their dollar holdings into rupees.
Exporters were earlier allowed to have 100% of
their income in dollars in their Exchange Earner's
Foreign Currency Account (EEPC).
"The
facility of EEFC scheme is intended to enable
exchange earners to save on conversion/transaction
costs while undertaking forex transactions in
future," RBI chief general manager Rashmi Fauzdar
said in the circular. "This facility is not
intended to enable exchange earners to maintain
assets in foreign currency, as India is still not
fully convertible on [the] Capital Account." The
measure was essentially to reduce pressure on the
rupee.
Yet the downward journey of the
rupee has continued this week. It could deepen the
somber mood over the regional impact of a
weakening global economy and jitters over the
Greek government debt crisis and the fate of the
euro.
While the fundamentals of India's
economy remain strong, and the wise continue being
confident of long-term potential, India is no
longer seen as one of the emerging economic
markets reasonably protected from global storms.
The country's economic growth has slowed by nearly
three percentage points in the past four years,
from a high of 10%.
Soaring imports of oil
and gold also feature on the list of villains
blamed for the rush for dollars and a weakening
rupee. India has an average daily bill of $500
million for oil imports, and an increasing
purchase of dollars to pay for oil weakens the
rupee, and a weaker rupee results in a higher oil
import bill. The higher oil bill is already
playing havoc with politically sensitive domestic
fuel prices, with uproar each time they are
increased. Another rise in fuel prices appears
imminent.
Higher oil costs are in turn
driving up consumer prices and slowing
manufacturing and industrial growth. The RBI
confirmed the bad news in its monthly bulletin for
May on the October-December quarter of the
financial year that ended on March 31.
The
latest RBI overview of the economy reported that
the balance of payments was coming " under
stress", with a widening trade deficit during the
last three months of 201. Investment has dipped,
and foreign exchange reserves went down by $12.8
billion in October-December, compared with an
increase of $4 billion during the same period the
previous year.
Yet rather than seeing a
decline in the rupee as a blow to "Brand India", a
pragmatic view sees the fall as a reality check.
"The Indian economy will learn to adjust to a new
[low] level of the rupee, although the adjustment
will be painful for some and positive for others,"
said investment consultant Arjun Parthasarathy.
Parthasarathy remembers that India's rise
in as information technology outsourcing hub a
decade ago was due to a weak rupee. "Even after
the rupee gained strength, India's IT sector only
marched forward, not backwards, as seen by the
CAGR (compounded annual growth rate) growth of
over 20% in revenues over the last 12 years," said
Parthasarathy, currently investing his two decades
of experience as an investment banker in running
an investor guidance website.
Aggarwal of
SMC, who expects the rupee to trade between 51 and
55 to the dollar for some time, argues that
"Weakness and volatility in currency always act
negatively in the investment decision of any
foreign investor. But given the larger context,
the current rupee slide might well serve as an
economic partition of India, with those with less
faith leaving the country to leave the rest to
prosper in peace."
Comparisons are
emerging also to around 1991, when similar
resource and economic challenges led to the
reforms led by then finance minister Manmohan
Singh, and the celebrated opening up of India's
economy, to be followed by a decade of increasing
foreign investment, growth and prosperity. "This
is an era of reduced earnings and increased
'learnings' for all market participants," said
Thunuguntla
If life is about learning how
to turn troubles into triumphs, lessons learnt
from the rupee dive could usher in the next
generation of more concrete reforms - and an
economy growing on sound industrial quality than
merely being a hub for cheaply available labor and
skills.
(Copyright 2012 Asia Times Online
(Holdings) Ltd. All rights reserved. Please
contact us about sales, syndication and
republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
