Money & Banking

Rupee stumbles before stabilising

ANAND KALYANARAMAN | Updated on April 04, 2012 Published on April 03, 2012


In the past fortnight, the rupee fell almost 2 per cent against the US Dollar, before recouping some lost ground. The INR finally closed at 50.72 against the dollar, down 0.63 per cent. Nervousness about participatory notes (P-Notes) being brought under the ambit of the General Anti-Avoidance Rules (GAAR) stoked fears of declining overseas portfolio funds into the country. This contributed to the weakness in the rupee. The Finance Minster's assurance to the contrary aided sentiment and helped the rupee stabilise against the greenback. The Open Market Operations (OMO) through which the RBI infused Rs 10,000 crore into the banking system also helped turn sentiment in favour of the rupee. The rupee lost 1.46 per cent against the Euro which had a strong run over the last two weeks.

The Euro also gained 0.61 per cent against the US dollar, and currently yields $1.33 per piece. Statements by the German Chancellor allowing the existing temporary rescue fund (EFSF) to run along with the permanent rescue fund (ESM) to ease the Euro-zone's debt troubles helped boost sentiment in the Euro. Meanwhile, expectations of the US Federal Reserve continuing with its accommodative policy contributed to weakness in the Dollar. The Dollar Index fell 0.8 per cent over the fortnight to close at 78.92.

Widening deficits

While the rupee has rallied from its lows, it continues to be under pressure and trades below the crucial 50 level mark against the US dollar. Of key concern is the widening current account deficit (CAD). Recent data released by the RBI shows that CAD widened to 4.3 per cent of the gross domestic product in the October – December 2011 quarter compared with 2.3 per cent in the year-ago period. At $19.4 billion, the CAD is the highest-ever in a quarter. Combined with this, slowing capital inflows during the quarter led to a considerable drawdown in the country's foreign exchange reserves.

Slowing export growth combined with high rate of growth in imports led to the highest-ever trade deficit of $47.7 billion in October – December 2011 quarter. This was a key reason for the worsening CAD. The recent merchandise numbers for February 2012 also do not inspire confidence with exports growing just 4.28 per cent (the slowest in 3 months) while imports grew much faster at 20.65 per cent. The high twin-deficits (current account deficit, and fiscal deficit which shot up to 5.9 per cent in 2011-12) increase the risk of inflation and further weakness in the rupee.

The RBI's monetary policy statement on April 17 may be a key influence on the rupee's movement in the coming days.

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Published on April 03, 2012
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