Fundamentals weigh on the rupee: Nirmal Bang
Believe it or not, today the rupee is hovering around 53 against the US dollar. The deteriorating external environment has driven investors to the US dollar as a flight to safety, hitting most Asian currencies.
December 26, 2011 / 13:14 IST
Believe it or not, today the rupee is hovering around 53 against the US dollar. The deteriorating external environment has driven investors to the US dollar as a flight to safety, hitting most Asian currencies.
The depreciation in the rupee increased when weakening domestic environment in the form of widening current account deficit, coupled with a rising fiscal deficit, came to the fore. In the wake of an impending global slowdown and weak fundamentals at home, nothing augurs well for the rupee in the months ahead.We have compiled a mix of external and internal factors, which we believe would continue to push the Indian rupee northward to around the 56.00-57.00 levels in FY12.Twin DeficitsA widening current account deficit and higher fiscal deficit (known as twin deficits) have raised serious macroeconomic concerns for India. These can be attributed to the sharp fall in the Indian rupee.Recently, we saw revision in fiscal deficit from 4.7% to 5.7% for FY12. The government is over ambitious, considering shrinking tax revenues and lesser proceeds from the disinvestment process. It is likely the fiscal deficit for FY12 may hit the psychological mark of 6% of GDP.On the trade front, the dwindling consumption in the developed world is showing a fall in Indian exports. In view of the emerging headwinds, Balance of Payment (BoP) would remain under pressure for the remaining part of FY12, causing persistent weakness in the rupee.Expensive and tight supply of ECBMany corporates knocked the window of External Commercial Borrowing (ECB) after rate hikes by the RBI pushed the cost of capital higher in the domestic markets. However, due to surging LIBOR rate (International dollar-funding rate), the ECB window seems to have narrowed of late, capping the dollar inflows further.Looking at the dollar crunch in the global markets, the dollar funding rate is likely to remain elevated for the last quarter of FY12. Against this backdrop, coupled with lesser risk appetite of Western banks to lend to the emerging markets in the prevalent uncertain environment, India Inc is less likely to raise funds through the ECB route in the coming days, despite the Reserve Bank of India relaxing overseas borrowing norms.Moreover, low investment sentiment with the falling rupee is not too conducive for corporates to tap the ECB route, which could take a toll on the demand for ECBs.RBI StanceConsidering that inflation has remained persistently much above the comfort zone of the RBI for almost two years, the central bank persevered with its anti-inflationary stance during the current year.However, the RBI gave due consideration to growth risks in the last policy review meet, reflecting the moderating growth concerns. The policy stance has been calibrated broadly in the context of inflation-growth dynamics, with more emphasis on containing inflation.Now with signs of moderation in demand and RBI
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