India Rupee (INR) today at this time is hovering around 61.27 per USD. It touched all time low yesterday and fell below level of Rs 61.8 per USD before showing mild recovery.
The recovery yesterday was not on the intrinsic strength of Indian Rupee but due to intervention of RBI which started selling USD in the market.
Some questions for which India is looking for Answers are- How long can RBI sell Dollars in the market? Does India has enough forex reserves to sustain frequent market intervention? Where is the market headed to and what is true worth of Indian Rupee?
In fact, such is the fear in the market against further fall of rupee that most dealers have covered their short positions.
Would Rupee gain strength
On its own merit the answer is clear NO. However for some other factors such as expectation of dollar inflows for the HUL share buyback as also remittances from NRIs may help INR gain strength and INR may touch Rs 59 plus levels. However, it appears very difficult that INR would be able to sustain at this level for long.
Moreover, European Central Bank, a traditional supporter of INR till recently is also not ending any support to INR.
Why the Fall?
Simple logic governs the value of any currency- What is demand for that currency. Demand for the currency stems from the value of the potential exports from that country. Ths, more i=the exports from the country, the stronger would be its currency. Conversely, the more the country imports, the weaker its currency would tend to get.
All major products in the country such as Oil, Technology, Major parts of Automobiles, critical components of electronic durables, defence armaments are being imported. Except of certain minerals, India has hardly anything to export.
The value would have depreciated much earlier but for the heavy inflows of USD in the market, especially in stock markets and other sectors. Now ith stock markets not giving any impressive returns, this flow has dried up and in fact may register negative growth.
Country has not demonstrated any major initiative to boost industrial growth adding to bearish sentiment. On the contrary, the country has already slid into election mode which otherwise is about an year away. As such populist schemes are on the anvil and the government has no strength to take strong decisions that may infuse strength in the economy.
As yet, fortunately, we are not in the state as we reached in 1991 when we were close to default and the foreign exchange reserves had dried up to the point that it could barely finance three weeks’ worth of imports.
However, in the absence of any significant inflows, we are reaching a stage where rupee might have to be devalued.
Fundamental reasons need to be addressed
The fundamental reason is that our policy makers do not seem to realise the problem of huge deficit on current account and over dependence on capital inflows. Nobody can live forever on somebody else’s money. This deficit which was being financed by foreign money for last many years, may not find any further support as the U.S. economy gathers momentum.
After all, we cannot expect foreign investors to keep financing us when we keep incurring deficits year after year. Somewhere the music is going to stop.
Our economy is growing at less than 5% rate per year, which is lowest in the last ten years. In fact unless the dependence on imports is not reduced and exports are not encouraged, very soon we may see level of s 64 to an dollar- sooner than many would expect.
The Reserve Bank, too, lacks fire power because it has foreign exchange reserves to cover imports for seven months only.
India has probably the widest range of tourism spots to offer yet in tourism inflow in the country is fraction of what Thailand earns in an year despite i being a small fraction of india in terms of its size.
Impact on stock market
With fall in value of Rupee, Exporters are facing the heat. The weakening of the rupee has seen cotton exporters scurrying for ‘cover’ to meet the shipment schedule.
Even otherwise, the present valuations of the stock market are largely driven by inflows of FIIs. After the expected outflows of the USD at year end, the share prices may register further decline.
The current price of USD is expected to trigger another rise in value of Petrol/ Diesel which in turn would trigger next round of inflation. Higher inflation would lead to further fall in consumption or to say Industrial growth and thus setting stage for further decline in Sensex
At this rate, the sensex may tumble to any level nearing 15000 towards Mid December 2013 or so