Moneycontrol
Aug 23, 2013 08:31 AM IST | Source: CNBC

Is rupee 'out of control'?

India has been gripped by a mood of crisis in recent weeks, despite Prime Minister Manmohan Singh's reassurances on Saturday that India was not headed for a 1991-style balance of payments crisis.

Is rupee 'out of control'?

As the battered down rupee slumped to yet another lifetime low of 64.54 to the dollar on Wednesday, analysts say the selling is getting out of hand and the currency could fall to 70 in the coming months.

Foreign investors have yanked money out of India in recent months amid fears over the winding down of US monetary stimulus and deteriorating economic conditions in the country.

The rupee has been one of the world's worst performing currencies this year as a result, slumping 15 percent since late May when the Fed tapering fallout first took hold.

Keagan York, head of currency strategy at Sydney's Compass Global Markets, said the rupee was going into free fall.

"I wouldn't touch it right now," said York. "If you are an importer looking to buy Indian goods, I'd wait, as they are just going to get cheaper and cheaper."

Many analysts are now calling for levels as low as 70 to the dollar over the next few months, a decline of over 9 percent from current levels.
Lasanka Perera, managing director at Global FX Partners, said the rupee is now "out of control."

"We've got high inflation, continual downgrades in growth and the Reserve Bank of India (RBI) has failed to create stability and confidence around that currency. As long as there is no change I think 70 (to the dollar) is well within reach," he said.

India has been gripped by a mood of crisis in recent weeks, despite Prime Minister Manmohan Singh's reassurances on Saturday that India was not headed for a 1991-style balance of payments crisis.

A key part of the problem seems to be that investors have lost confidence in India's central bank, after it made a number of confusing moves dubbed by many as policy "flip-flops."

Late on Tuesday, the RBI announced plans to inject 80 billion rupees (USD 1.3 billion) into the country's banking system by buying long term government bonds amongst other steps, which industry watchers say contradicts its recent tightening moves including the imposition of capital controls last week to prop up the rupee.

"The RBI policy moves are sending mixed signals. They cannot control both yields and FX. They are trying to control too much and are losing credibility," said Nizim Idris, head of strategy, fixed income and strategies at Macquarie Bank, who has revised his forecast for dollar-rupee to 70 by year-end, versus a previous forecast of 64-65.

Idris said the RBI's latest move to buy bonds in a bid to reduce government debt yields, which have hit 9.48 percent, could have a reverse effect.

"To attract capital back into India, investors need to see value and value should come from wider real bond rates through higher yields. By buying bonds they are actually reducing the bond market's value, and subsidizing foreigners who are exiting the market," he noted.


Compass' York said he did not see the rupee moving quite as low as 70 to the dollar, but is sticking to his forecast of 68 by the end of the year. He said a silver lining is that the weaker rupee should provide a boost to Indian exporters.

"I expect it (the rupee) will see a bit of resistance at that level (68 to the dollar) as India should see a pick-up in manufacturing," he said.


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