The Indian rupee has fallen sharply against the US dollar in recent months, dropping 23% since the start of 2012 and hitting a record low. The rupee slide is due to India's large and growing trade deficit, which ballooned to $185 billion in 2011-12 as imports increased faster than exports. Measures taken by the government and the Reserve Bank of India to support the rupee have been ineffective, as the underlying issues of a weak export sector and high oil import bill remain unaddressed. With foreign capital also leaving the country, further declines in the rupee's value appear difficult to prevent in the near term.

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Governmentactionsfailtopropuprupee
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Restricts rebooking of can-
celled forward contracts to
stop forex speculation
Cuts net overnight open po-
sition for forex holders
Deregulates interest rates
on rupee deposits from
non-resident Indians
Relaxes the interest ceiling
on FCNR deposits to attract
funds from NRIs
Deregulates interest rates
on export credit in foreign
currency
Defers budget-pro-
posed GAAR rule
to boost stock
market
Eases restric-
tions on the us-
age of foreign cur-
rency deposits
Allows banks to
use FCNR deposits
at collateral against
lending to local cos
Exporters told to convert
50 per cent of dollar
earnings into rupee in 14
days
Allows intra-day trad-
ing at 5 times the net
overnight open posi-
tion limit
Imposes restric-
tions of $100 m on
“position limit” for
forward contracts
by banks
Dilip Maitra
BANGALORE: The Indian ru-
pee is making headlines to-
day, but mostly for the
wrong reasons. Its value has
been falling against the US
dollar steadily and since the
beginning of 2012, it has
fallen 23 per cent, closing at
a record low of Rs 55.39 on
Tuesday.
Theworrisomefact,howev-
er, is that no one has any
inkling, the government and
theFinanceMinistrytheleast,
as to how deep the rupee will
fallandhowlongwillthedown-
turn last? Research units of
some banks have already pre-
dictedthattherupeemaysoon
touch 60 to a dollar.
About a month ago when
the rupee was at 48, such pre-
dictionswouldhavelookedpre-
posterous, but not anymore.
Worst, neither the Finance
MinistrynortheReserveBank
of India (RBI) can do much to
stop the fall.
There are several reasons
behind this pessimistic view.
The most important factor is
that India’s deficit in foreign
trade – excess of imports
againstexports–hasballooned
to an all time high of $185 bil-
lion in 2011-12, a whopping 56
per cent more than $119 in
2010-11.
The culprit is the import of
crudeoil,petroleumproducts,
gold, coal, fetiliser etc. Oil im-
ports at $152 billion, for in-
stance, accounted for 31 per
cent of the total import bill.
Similarly, the import bill for
gold and silver was at $60 bil-
lion,thesecondlargestitemin
the basket.
Our imports went up by 32
per cent in 2011-12 to Rs 489
crore, our exports at Rs 304
crore were higher by 21 per
cent. Since the financial tur-
moil in Europe has resulted in
severedemandcontractionsin
many European countries, a
major destination for Indian
exports, India’s total export
earnings, experts believe, are
likelytostagnateormarginally
go up in the current year.
Imports, on the other hand,
will keep growing as the coun-
try will consume more of oil
(we import 80 per cent of our
need),coal(forproducingpow-
er and steel) and fertiliser (to
sustain food production).
Thankstodoublingofcustoms
duty, gold consumption in
2012-13 is likely to be lower.
There is no doubt that we
need to curb consumption of
oil by raising prices, but the
coalitiongovernmentdoesnot
have the necessary support to
do so. The fear of a spike in in-
flation is another reason why
the oil price hike is delayed.
In a recent interview, CLSA
Asia-Pacific Markets Econo-
mistRajeevMaliksaid,“Weak-
errupeeorthepressureonthe
rupeeisnotreallytheunderly-
ing problem; it is just a symp-
tomoftheunderlyingproblem.
Wehaven’tseenanymeaning-
ful corrective action from the
government to address any of
this.”
Ineffective measures
WhilethegovernmentandRBI
has taken several steps (see
box) in the last five months to
arrest the fall of rupee, it has
defied all. Said a report by the
FXResearch&StrategyofNo-
mura:“Althoughweexpectthis
measuretoleadtoamoresus-
tained INR rally (compared
withrecentFXmeasures),this
policy does not address medi-
um-term concerns over the
current account deficit.”
Manyhavealsocriticisedthe
RBI for not doing enough to
stem the rupee’s fall without
realising the fact that the cen-
tral bank has very limited fire
power to do so. While the RBI
has intervened intermittently,
it did sell $20 billion in spot
markets in six months till
March2012,buttherupeecon-
tinued to fall.
Talking about RBI’s efforts,
RBI Deputy Governor Subir
Gokarnhassaid:“Thereisvery
strong pressure on the rupee
to depreciate. We have done a
numberofthingsandwillcon-
tinuetodothingsthatwethink
have an impact of stabilising
the rupee.”
We should also remember
that in the RBI’s total foreign
exchange reserve of around
$292 billion gold accounts for
about $32 billion and the bal-
ance$260billionisjustenough
to sustain about 7 months’im-
port.
Naturally, the central bank
needs to conserve its cash to
make sure it is able to pay for
the import bill. Besides, low
forex reserve, implying weak
defence power, can make a
country vulnerable to major
speculative attacks by global
currency sharks.
Large outflow of dollars
fromtheIndiancapitalmarket,
foreign funds are major net
sellers of stocks in the first five
monthsof2012,isanotherrea-
son for the fall of rupee.
As the government’s report
card on economic reforms is
miserable and it failed to open
up many sectors to foreign in-
vestments, India ceased to be
apreferreddestinationforfor-
eign funds.
Strengthening of dollar
against major currencies like
Euro, Pound Sterling and Yen
is another reason why the ru-
pee is becoming weaker.
Few options
While there are several funda-
mental changes the country
Rupee heading for 60? It is difficult to stop the slide
can initiate to strengthen the
rupee, they are long-term in
nature.
A few of these measures are:
enlargeexportbasket,diversify
export destination, cut down
importstobareminimum,de-
control all oil products, lower
inflationandinitiatereformto
make investment climate at-
tractive.
But the short-term options
are few and less effective. Of
course, the government can
imposecapitalcontrolstodras-
ticallyreduceforeignexchange
outflow but such a draconian
and internationally unaccept-
able measure can be consid-
ered as a last resort. We can
buyoilinrupeefromIranwith-
out succumbing to American
pressure.
Another possible option is
to launch sovereign dollar de-
nominated bonds with an at-
tractive rate of interest, such
as the India Resurgent Bond
and the India Millennium
Bondissuedin1988and2000,
respectively.
TheRBIcanalsodirectlysell
dollars to oil companies, who
are large buyers of dollars for
oil imports, without affecting
the market price.
DH News Service