INDIA'S
CURRENCY GOWING DOWN DAY BY DAY: 2018
1 DOLLAR = 72.10 INDIAN RUPEE
INDIA'S FINANCE MINISTER : ARUN JAITLEY outlines series of measures to
stem declines in rupee.
NEW DELHI/MUMBAI: The Indian government late
on Friday announced a slew of steps aimed at stemming a steep decline in the
rupee, which has fallen rapidly this year, and it left the door open to
announcing more measures.
After an economic review meeting chaired by Prime Minister Narendra Modi, India's finance NSE 2.54 % minister said the government plans to take measures to cut down "non-necessary" imports, ease overseas borrowing norms for the manufacturing sector and relax rules around around banks raising masala bonds, or rupee-denominated overseas bonds.
The moves follow sharp declines in the rupee, the worst-performing Asian currency this year. Despite strong GDP growth, the rupee has weakened about 11 percent this year amid higher oil prices and an emerging markets sell-off.
This has widened India's current account
deficit and pushed its balance of payments into the red in April-June for the
first time in six quarters and stoked inflationary pressure in the economy.
"Dollar outflows, trade wars and high global crude oil prices have hit India despite strong fundamentals," said Finance Minister Arun Jaitley, adding a falling rupee has hurt the current account deficit and this needs to be dealt with "immediately."
Jaitley said manufacturing entities will be permitted to make use of external commercial borrowings (ECBs) of up to $50 million with a minimum maturity of one year, down from three years earlier.
A Singapore-based forex dealer said the measures
would not do much to bolster the rupee.
"These are small, cosmetic measures and will mildly help the rupee on Monday. But we need stronger measures," said the forex dealer, adding the markets had been hoping the government would announce measures like Non-Resident India (NRI) bonds.
"These are small, cosmetic measures and will mildly help the rupee on Monday. But we need stronger measures," said the forex dealer, adding the markets had been hoping the government would announce measures like Non-Resident India (NRI) bonds.
During currency crises in 1998, 2000 and 2013 India tapped expatriates to invest in NRI bonds to help boost its foreign exchange reserves and stem declines in the rupee.
Jaitley declined to comment on any such
measure, saying "this is a market sensitive information." He added
that there would be further meetings and more steps would be announced
separately.
POTENTIAL TRADE TENSIONS
POTENTIAL TRADE TENSIONS
The forex dealer said the market would
closely watch which "non-essential imports are being curbed."
The government did not provide any details, but earlier a trade ministry official told Reuters that curbs could be placed on imports like gold and high-end electronic items.
The government did not provide any details, but earlier a trade ministry official told Reuters that curbs could be placed on imports like gold and high-end electronic items.
India's gold imports in August rose over 90
percent to $3.64 billion, according to data released on Friday.
India, the world's second-biggest gold consumer, has already raised its goods and services tax on bullion this year and taken other steps to curb gold purchases that drain the country of its forex reserves.
Any move to impose more tariffs on high-end electronic items or curb imports of such products though, could heighten tensions with the United States, which has already raised objections this year to India's move to raise duties on dozens of items to help its flagship Make-in-India drive.
Ford, which has two plants in India, has pushed for a reversal of new tariffs on auto components, while Apple is concerned its iPhones have become even more expensive in the price-conscious $10 billion smartphone market.
India, the world's second-biggest gold consumer, has already raised its goods and services tax on bullion this year and taken other steps to curb gold purchases that drain the country of its forex reserves.
Any move to impose more tariffs on high-end electronic items or curb imports of such products though, could heighten tensions with the United States, which has already raised objections this year to India's move to raise duties on dozens of items to help its flagship Make-in-India drive.
Ford, which has two plants in India, has pushed for a reversal of new tariffs on auto components, while Apple is concerned its iPhones have become even more expensive in the price-conscious $10 billion smartphone market.
India's Economic Secretary S.C. Garg told a local television channel that no domestic measures related to oil were discussed at the Friday meeting.
The weaker rupee and higher oil prices have driven the price of fuel in the country to record highs, causing concern for the government that faces elections in three major states just a few months from now. Modi, who is widely expected to seek a second term, also faces a general election in less than nine months.
Earlier this week, nationwide protests against the record high petrol and diesel prices shut down businesses, government offices and schools in many parts of the country.
Six reasons why
India's rupee is in freefall
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Rupee in a free fall, hits fresh all-time low of 72.10 level
against dollar
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Image caption Domestic and international
issues have hurt the Indian currency in recent months
Since July last year, the Indian rupee has
fallen by more than 27% against the US dollar, one of the biggest declines
among Asian currencies.
Here are six main reasons for the steady
slump in the value of India's currency:
HUGE TRADE DEFICIT
Since India imports more goods (in value
terms) than it exports, it results in a huge imbalance in trade, or what is
called a trade deficit.
In the financial year ending March 2012, the
deficit zoomed to $185bn (£118bn) compared with the original estimate of
$160bn.
India's Commerce Secretary Rahul Khullar has
predicted that the trade deficit may be slightly lower in 2012-13, due to
falling global crude prices and recent government curbs on gold imports.
A $1 per barrel decrease in crude price
reduces the country's deficit by $900m at existing import volumes.
On the flip side, India's export performance
may prove to be a dampener this year.
Mr Khullar has added that India will be lucky
if exports, which grew 21% in 2011-12, manage to witness a growth rate of
10-15% in 2012-13, due to the crisis in Europe and slow economic recovery in
the US.
LOWER CAPITAL INFLOWS
Although India has become an attractive
destination which can woo foreign capital as well as money from non-resident
citizens, it is not enough to make up for the trade deficit.
In 2011-12, India received foreign direct
investment of more than $30bn, in addition to a net inflow of $18bn from
foreign institutional investors in stocks and bonds.
But uncertainty about India's commitment to
economic reforms, retrospective taxes, and policy paralysis within the
government have forced foreigners to either postpone their investment
decisions, or take money out of Indian stock markets.
HIGH CURRENT ACCOUNT DEFICIT
The country's current account deficit - a
broader measure of the trade deficit - has also ballooned due to the above
reasons.
In 2011-12, this deficit was more than $74bn,
a huge jump from less than $46bn a year ago. In 2012-13, it may be even higher
at $77bn.
The result is that India's foreign exchange
reserves have dropped from a peak of $320bn in September 2011 to $290bn now.
DEVALUATION PRESSURE
In such a situation, more people tend to sell
rupees to buy dollars (or any other foreign currency that they require).
Importers scamper for dollars to cater for
their needs to buy goods abroad.
Exporters cannot bring in enough dollars; in
fact, they keep their foreign earnings abroad as they expect the rupee to fall
further.
Meanwhile, foreign investors increase the
demand for dollars as they convert their rupee assets into dollars to take
their money out.
This demand-supply gap between the dollar and
the rupee leads to devaluation.
LOW GROWTH AND HIGH INFLATION
This trend is accentuated by low growth and
high inflation in India.
After annual economic growth of nearly 9% in
2009-10 and 2010-11, the country is likely to grow at 6.5% in 2011-12.
The expectations for 2012-13 are not too
encouraging.
Couple this with high inflation due to high
food and fuel prices. The rate of inflation may rise this year to double digits
if the government is unable to curb its fiscal deficit.
In this scenario, most foreigners as well as
Indians tend to take money abroad, or keep it away from India.
Global investors are also nervous about
investing abroad in nations such as India due to the economic crisis in their
respective countries.
That has added further selling pressure on
the rupee.
RUPEE SPECULATION
The Reserve Bank of India's bid to sell dollars
in the open market to restrict the rupee slide has failed in the past few weeks
and months.
This has complicated the situation further.
Once currency traders and speculators realise
that India's central bank is unable to manage its exchange rate, and reduce the
adverse impact on its currency, they may enter the market in a big way to sell
the rupee.
As a result, the rupee may devalue more than
it should.
Experts, who a few weeks ago predicted that
the Indian currency might stabilise at 55 rupees to the dollar, now say this
may happen at 60 rupees.
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Indian Rupee is Falling Against the US Dollar
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