The rupee has put up a sorry performance this calendar. Not only is it down 11 per cent against the dollar and 8 per cent against the euro, it has also lost ground against most major currencies. The currency’s performance is not heartening compared with its emerging market peers either. It is the worst performing emerging market currency with only the South African Rand registering a greater decline.
It is obvious that it is the inherent weakness in domestic economy that has been weighing on the rupee. India has been running a Current Account Deficit (CAD) since the 1960s. But this figure did not exceed $3 billion in a quarter till 2008. With the mounting crude oil, coal and gold imports, coupled with slowing growth in exports, the CAD hit a historic high of $31.9 billion in the quarter ended last December.
Though there has been a moderation in the CAD in the March 2013 quarter, the rupee will continue to face pressure from this factor this fiscal. The trade deficit that has swelled to a record high $58 billion in December could get some respite from the slowdown in gold imports due to the RBI’s recent moves to curb them. But non-gold imports will continue to hurt as other global commodity prices have already corrected over the past two years.
India’s external debt situation is not too comfortable either. Widening trade deficit is resulting in pushing up the trade credit. Total external debt towards the end of March 2013 at $390 billion was 14 per cent higher than the March 2012 figure. The share of short-term debt has also risen to 44.2 per cent of total debt and the ratio of forex reserves to external debt has also declined to 75 per cent, lowest since 2003. These increased short-term payment obligations are also not conducive to rupee over the next year.
Therefore, current account deficit could stay worrisome and short-term payment obligations are also expected to exert pressure on the rupee.
The rupee has been moving in a downward trajectory against the dollar over the past 50 years. One significant low was recorded in May 2002 at 49 following which there was a period of strengthening till January 2008. The rupee hit the peak of 39 then.
A new leg of the structural downtrend is in motion since January 2008. According to Elliott Wave Analysis, one zigzag pattern could have been completed last June. If another zigzag is evolving now, we get the minimum target at 64.9. This will take a few more months to form. If this target is crossed, we will have to look at a level beyond 70. In the near term, the rupee could strengthen to 58 or 56.3. The risk of another steep depreciation remains as long as the currency trades below 57. Close beyond 57 will be the first signal that the short-term trend is reversing higher. A close above 53.6 is needed to signal that the medium term trend has reversed.