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The rupee is in trouble, and nobody seems quite sure
what to do about it. The Indian currency closed at
an all time low of 64.11 against the U.S. dollar on
Wednesday alongside a tumbling market, feeding
widespread anxiety over the fact that the government
has yet to curb the currency’s downward trajectory
since it started tumbling in May. On Wednesday,
Deutsche Bank issued a report saying the rupee may
reach as low as 70 in the coming months.
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.
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.
Although India has become an attractive
destination which can attract foreign
capital as well as money from non-
resident citizens, it is not enough to
make up for the trade deficit.
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.
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
• In such a situation, more people tend to sell
rupees to buy dollars.
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
Meanwhile, foreign investors increase the
demand for dollars as they convert their
rupee assets into dollars to take their money
This demand-supply gap between the dollar
and the rupee leads to devaluation
This trend is accentuated by low growth and high
inflation in India.
Annual economic growth of 6% in 2012-13.
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.
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 realize
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
• Export-oriented sectors could benefit. Companies in the
information technology (IT) and textile sectors should benefit
from a weak rupee. Rupee depreciation helps IT companies .
• The Indian rupee fell 0.7 per cent against the US dollar at
67.71 on the back of a weak trade data. The Indian rupee has
shed close to 25 per cent value over the past one year. It is
likely to fall further.
• Corporate India is a net borrower of dollar and to that extent a
depreciating rupee impacts its balance sheet adversely. Companies with
foreign debt on their books are badly impacted. With the rupee
depreciating against the dollar, these companies will need more rupees to
repay their loans in dollar. This will increase their debt burden and lower
their profits. Obviously, investors would do better to stay away from
companies with high foreign debt.
Bharti Airtel is one such company that has raised money overseas.
Then there are oil marketing companies like HPCL. BPCL and Indian
Oil, which could also be negatively impacted. Since these companies import
crude oil, they will end up paying more rupees for the same dollar value of
The value of the rupee in terms of dollars
will depend over time on the erosion of its
value in terms of purchasing power
internally. If inflation has been at say, 7
percent, the rupee will have to fall to that
extent unless the importing countries are
themselves victims of inflation. That is not
the case. Hence, the rupee has fallen the
most compared to other currencies because
we had nearly the highest inflation.
Eventually, the rupee will stabilize, barring
short-term disturbances, after correcting the
loss in its domestic purchasing power.