'India must cut subsidies, push reforms to defend rupee'

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Gyanendra Kumar Keshri | 25 Jun, 2012
The Indian rupee is likely to slide further and might soon touch 58 to the dollar as regulatory measures by the central bank are unlikely to have any significant impact on the currency, analysts say.

"The monetary policy has its limitations. The RBI intervention won't do much as the issue is structural," said Anis Chakravarty, senior director, Deloitte India.

The rupee continues to slide despite a series of regulatory measures taken by the Reserve Bank of India (RBI).

The partially convertible rupee hit a new record low of 57.33 against a dollar in the intra-day trade Friday. The rupee ended the week at 57.12 against a dollar, closing in the red all the five trading sessions of the week.

The rupee has lost almost 22 percent of its value against the dollar in the past one year. It has depreciated 11 percent since April.

In fact, the the Indian currency has lost over 46 percent of its value since touching a high of 39 against the dollar in January 2008.

Chakravarty said rupee would continue to weaken in the medium-term unless the structural issues of economic growth and burgeoning subsidies were addressed.

"The downside risks are more. It may soon touch 58 level, or even go further down," said Chakravarty.

He said Indian rupee has weakened sharply in the recent months due to combination of global and domestic factors.

Chakravarty pointed out that on the domestic front, there is uncertain macro-economic situation. Economic growth is down, inflation continues to be at stubbornly high. Current account deficit is at record high. There is balance of payment problem" "All this is putting pressure on the Indian currency."

Due to uncertain global economic situation, especially lingering crisis in the Eurozone, investors are hedging in the greenback. The dollar has appreciated against major global currencies, including the Euro.

Interestingly, the rupee continues to weaken despite the fall in crude oil prices. The crude oil price fell below USD 90 a barrel Friday for the first time in 18-months.

Kishor P. Ostwal, chairman and managing director of CNI Research Ltd, said fall in crude oil prices did not have the desired result on the rupee and it continue to bother the market.

"The fall in crude oil prices is a big plus which had raised the hope of a cut in petrol prices that should help check inflation. The point of bother is the rupee, and this is creating a headache," Ostwal said.

HSBC said in a research report that rupee is likely to remain in the range of around 57 against a dollar.

"For Indian rupee to strengthen more meaningfully and sustainably against the dollar, the government needs to undergo the necessary structural reform"," HSBC said in the report.

Due to uncertain macro-economic situation, overseas investors have pulled money out of the Indian equity markets. Foreign institutional investors have pulled over USD 225 million out of the Indian equity markets since the beginning of the current financial year.

Although the outflow so far is small, the risk of capital repatriation out of India is high, HSBC said.

Structural reforms are needed to improve macro-economic situation that would boost confidence in the Indian currency. The gross domestic product growth slumped to 9-year low of 5.3 percent in the quarter ended March 31, 2012.

Currency account deficit is likely to swelled above 4 percent of the GDP in fiscal 2011-12, after remaining below 3 percent since 1991.

Because of the high public spending, especially on subsidies, fiscal deficit grew to 5.9 percent in financial year ended March 31, 2012 from 4.9 percent in the previous year.

Terming the widening current account deficit "worrying" RBI Governor Duvvuri Subbarao last week said it was putting pressure on the Indian currency.

He said the central bank would intervene in the currency markets only to contain volatility of rupee.