16 December 2011

Rupee hits 54 to a Dollar; Possibly More Lows Ahead

Continuing to underperform among the Asian currencies, the Indian Rupee hit a fresh low of 54.30 to a dollar on Thursday early trade deepening the losses to 20 percent from its July high thriving its way for the fourth straight day of low. The falling rupee will see no relaxation in the near future as financial experts indicate that Rupee fall could hit as low as 55-56 against the dollar. So is there more pain to come? Is there nothing that can prevent the rupee from heading towards uncharted waters?
Rupee hits 54 to a Dollar; Possibly More Lows Ahead

In November, Moses Harding, Executive VP and head of wholesale banking at IndusInd Bank, warned the rupee could fall as low as 54-56 against the dollar. Nomura Financial Advisory and Securities: Target 55 rupees/U.S. Dollar, Morgan Stanley: Target 54.80 rupees/U.S. Dollar and Barclays Capital: Target 54 rupees/U.S. Dollar, as quoted by WSJ.

These predictions seemed a little unrealistic a few months back, but now that the rupee has hit 54, these predictions don?t seem that fantastically outrageous any more.

The watchdog of Rupee, RBI has become a mere spectator because of its limited ability to intervene. Previously when rupee hit 52 low, RBI bailed out the rupee by selling few of its foreign shares from its kitty. It seemed like peanuts as it pulled up the rupee to a very small margin. But as it had mentioned earlier, it cannot be aggressive in propping up the rupee level. Why RBI cannot use the forex reserves to rescue the rupee?

The rising level of short term external debt has constrained the spending of the RBI. According to Morgan Stanley?s recent report on India's external debt, external debt due in the next one year accounts for 43.5 percent of India's foreign exchange reserves. The rupee hitting 54 makes it even more difficult for the pay back. Considering the Asia-Pacific region, India ranks the highest in the firing line for excessively indebted according to an analysis by Cornell economist Easwar Prasad in the Financial Times.

Foreign exchange reserves are much lower than our external debts. India's external debt stands at $305.9 billion, or 17.3 percent of GDP, according to the Reserve Bank of India (RBI) data. That's almost as much as the foreign reserves India has today, which is $319 billion as of July 29. No wonder, RBI is not able to stride the forex market guns blazing to defend the floundering rupee.

"We have to prepare ourselves for possibly new lows on the rupee every day," said Naveen Raghuvanshi, associate vice-president of currency trading at the Development Credit Bank. "You name a negative and it is there for the rupee," he said. "We could see 56 by end of this month." As quoted by ET. "We anticipate continued net outflows from the equity market into first half of 2012 as the uncertainty on the outlook for India growth, inflation and macroeconomic policies lingers," says Sailesh K Jha, head of Asia strategy at Skandinaviska Enskilda Banken.

He said the rupee was vulnerable because of large external debt payments of about $20 billion due in the first half of 2012 and because importers were not effectively hedged as quoted by ET. The rupee, Asia's worst performing currency this year, could slip to 55 to the dollar by the end of December and head to 57 in the first quarter of 2012, he said. However, the currency will probably rise modestly by the end of next year, a Reuters poll showed.