After holding steady for about a day, above the Rs66-mark against the US dollar and Rs18 against the UAE dirham, the Indian rupee slumped again on Tuesday morning, slipping almost 2 per cent to Rs67.26 against $1 and Rs18.31 vs. Dh1 at 11.15am UAE time (7.15am GMT).
The rupee held relatively steady after last week’s data showed that the country’s GDP growth had slowed down more than expected, to 4.4 per cent in the most recent quarter (April-June). However, more bad news emanating from the markets suggests that India’s economic woes are set to worsen going forward.
India’s latest manufacturing PMI (Purchasing Managers’ Index), which shows the level of raw material purchasing activity at factory level, showed contraction for the month of August, signalling a further perceived slowdown in demand.
An HSBC survey of purchasing managers at manufacturers across India, published yesterday (Monday), revealed a bleak outlook for the economy as raw material demand at Indian factories came out at its worse since March 2009, when the global economic crisis is largely believed to have bottomed out.
The rupee had, by end-August, lost more than 28 per cent of its value in less than four months (since May 2) when it made a lifetime low of Rs18.80 vs. Dh1 (Rs69.05 vs. $1) but then managed to stage a minor recovery after the Reserve Bank of India (RBI) supposedly stepped in to support the currency by selling dollars in the open market.
However, a double dose of bad news – the bleak PMI data came right after weaker-than-expected GDP growth numbers – was enough for the rupee to once again get on with its descent in early trade on Tuesday.
A number of analysts now believe that the Indian economy – and with it the beleaguered rupee – will see more pain ahead before gaining a footing and stabilising next year.
Apart from its own ballooning fiscal deficit thanks to a huge demand for imported oil and gold, India’s financial difficulties are being exaggerated by the expected tapering off of the US quantitative easing programme.
The US Federal Reserve is expected to announce a (nominal) reduction in its $85-billion-a-month bond buying programme, which is likely to hurt markets like India as a good proportion of such freshly minted money finds its way into emerging markets.
“The week gone by saw the Indian rupee continuing to lose against the US Dollar as investors fretted over fears of how the country will fund its large current account deficit as the US Federal Reserve is expected to begin tapering its monetary stimulus. The rupee hit a series of record lows during the week as the USDINR pair gained 3.71 per cent week-on-week,” wrote HDFC Securities’ analyst Subash Gangadharan in his weekly currency market perspective published today.
Last week, Indian Prime Minister Manmohan Singh tried to quell fears over the Indian economy and the rupee by making a rare speech in Parliament over the country’s recent economic woes. He insisted that the country does not face a 1991-style balance-of-payments crisis, and that fears that economic growth could slow down to 3 per cent were unfounded.
“There is no reason for anybody to believe that we are going down the hill and that 1991 is on the horizon,” he reportedly told the Indian Parliament.
“Prime Minister Manmohan Singh sought to soothe worries about the Indian economy on Friday, telling parliament that the crashing value of the rupee was part of a needed adjustment that would make Asia’s third-largest economy more competitive,” wrote HDFC Securities’ Gangadharan in his latest currency market report.
“The speech was the veteran economist’s first substantial comment to parliament since the rupee suffered its steepest ever monthly fall in recent weeks, bringing back memories of a 1991 balance of payments crisis that made Singh famous,” he wrote.
“Reading from a written statement, the prime minister promised his government would reduce the “unsustainably large” current account deficit undermining the currency. Clearly we need to reduce our appetite for gold, economise the use of petroleum products and take steps to increase our exports,” he wrote.
However, as Singh noted in his televised speech, a weaker currency is the outcome of several years of high inflation, and the rupee’s unprecedented decline may, in fact, bring some economic benefits.
“To some extent, depreciation can be good for the economy as this will help to increase our export competitiveness and discourage imports. Singh’s deft handling of the 1991 crisis helped launch 20 years of rapid economic growth and he has since been credited as the architect of India’s emergence as a serious economic power,” wrote Gangadharan.
Going forward, the HDFC Securities’ analyst believes the rupee could fall to Rs18.73 vs. Dh1 in the short term, still short of last Wednesday’s lifetime low.
“Technically, the USDINR pair remains in an intermediate uptrend, which could take it to our targets of 68.83 [18.73 vs. Dh1] in the coming sessions.”