How much has the rupee fallen? The fall has turned out to be more momentum-led than any sudden change in fundamentals. As on December 16,2011,the rupee had depreciated by about 19.5 per cent against the US dollar from 44.07 on August 1,2011. The decline gathered speed in the last four weeks and the currency hit the life-time low of 54.30 on December 15. Its one of the top losers among world currencies,second only to South Africas,and followed by other emerging markets like Mexicos and Brazils. When compared to this,China has managed its currency renminbi very well with a gain of 3.7 per cent in the last one year. Why is it falling? There are domestic and global factors. Indias exports growth decelerated sharply to an average of 13.6 per cent year-on-year in October-November from an average of 40.6 per cent in the first half of 2011-12. However,as imports moderated less than exports,the trade deficit widened,putting pressure on the current account. This,combined with re-balancing of global portfolios by foreign institutional investors (FIIs) and the tendency of exporters to defer repatriating their export earnings,has led to significant pressure on the rupee. On the external front,global investors are turning away from emerging markets like India in the wake of new risks like the eurozone crisis,high inflation and growth slowdown. FIIs are now pulling out funds from Indian stocks. To top it,there was excessive speculation that took the rupee further down,leading to curbs on forward contracts in the currency last week. What has been done to stop the slide? The RBI has been occasionally selling dollars from its forex kitty to prevent the slide. However,it has indicated that it was not in a position to use up all its forex reserves of $300 billion-plus to keep the rupee steady. Several measures were taken to attract inflows. Limits on investment in government and corporate debt instruments by foreign investors were increased. The ceilings on interest rates payable on non-resident deposits were raised. The all-in-cost ceiling for external commercial borrowings was increased. Further,a series of administrative measures,including curbs on forward contracts,that discourage speculative behaviour were also initiated. The RBI,last week,deregulated non-resident deposit rates to boost inflows. Whats the impact of the fall? The biggest casualties are importers,especially oil companies. They will have to shell out more rupees to buy the dollar,making imports costlier. A weakening rupee will force oil companies to jack up prices. The government has been under pressure not to pass on the high oil prices to the consumers which means a higher deficit. It will also impact the prices of other items like metals and oils,leading to imported inflation and making the RBIs fight against the soaring prices more difficult. Its bad news for students studying abroad and travellers as their costs will rise for every paisa drop in the value of the Indian currency. On the other hand,exporters will benefit as they will be able to get more profits while converting their dollar earnings into rupees. IT companies,which get a major chunk of their revenue from abroad,will get a bonanza for the same reasons. Will it recover? Yes. When the economy picks up steam,deficit levels and inflation come under control and capital flows increase,the rupee is bound to recover. This has happened several times in the past. Analysts say if the global situation changes and foreign investors start investing in emerging markets,India will also witness portfolio investments and the rupee will strengthen. The rupee had fallen in a similar way in 2008 but gradually recovered as India emerged unscathed from the global financial crisis.
