10 reasons why Rupee bit the dust at 68

The Rupee is again on a freefall and hit a record low of 68.75 against the Dollar on Wednesday despite RBI’s and Finance Minister P Chidambaram’s stringent attempts to diminish fears that the Food Security Bill may widen the fiscal deficit this year.  

Last week, the Rupee jumped back after hitting low at 65, sending positive signals to the markets, however, it returned to the bearish territory on Thursday.

India, however, is not the only country whose currency is weakening. Other emerging economies which are reeling under economic crisis include Indonesia, Brazil, Thailand, Malaysia, Russia, Turkey and South Africa because of fears that US may end its quantitative easing by year-end.

Here are the reasons for the Rupee hitting new record lows on a daily basis:

1.From India to Indonesia, the currencies and stock markets of emerging economies have been roiled by speculation about when the US Federal Reserve will start scaling back monetary stimulus that has kept interest rates ultra-low and sent investors to developing markets in search of higher returns. Separately, Asian economies that had been star performers are now in the dumps and the ebbing investment tide has sparked fears the region will suffer a rerun of its 1997-98 financial crisis, AP reported.

2.Another reason for the Rupee's decline is the passage of Food Security Bill in the Lok Sabha on Monday. The cost of the implementation of the Bill has been put at around Rs 1.3 lakh crore annually. There are fears that the it may adversely impact the UPA's ability to rein in the fiscal deficit at targeted 4.8 per cent of GDP for this year. Finance Minister P Chidambaram's assertion the execution of the scheme will not breach the 'Red Line' on the deficit did little to calm the Forex market. There are rumours that the RBI is likely to have intervened in the market to protect the rupee around 65.9 levels.

3.Adding to the woes is the demand for the Dollar from importers.

4.The freefall in the Rupee started in May this year when the US Fed chairman indicated that the US central bank may start tapering off its bond buying programme later this year as it expected a recovery in the economy there. The looming phase-out of the Fed's cheap money policy is having a sobering effect. Investors are being lured back to advanced economies such as the US, where growth is recovering, while Asia's prospects look less attractive as China shifts into a lower gear after years of torrid expansion. The pain is being felt most in India and Indonesia, where the investor exodus has sent currencies plummeting, threatening to fan inflation and widen Current Account Deficits. The two Governments have been forced to step in with measures aimed at boosting confidence. Also feeling the heat is Malaysia, where the central bank this month slashed its 2013 economic growth forecast to 4.5-5 per cent from 6 per cent. In Thailand, the economy contracted unexpectedly in the second quarter. However, the Indian currency has been the worst hit because of the outflows.

5.The Indian Government's firefighting has done more damage to the Rupee than saving it from falling grace. While the Government has opened up sectors for Foreign Direct Investment, the RBI has resorted to interest-rate defence of the currency. FDI measures are likely to be fruitful only over the long-term while RBI steps are seen largely as bandages that will be effective only for the short-term. However, a large number of experts now feel that the Government and the RBI have miserably failed in their efforts to stem the Rupee slide.

6.In order to control the volatility in the Forex market, the RBI stepped in on July 15 signaling increase in short-term rates by increasing marginal standing facility rate by 200 basis points. In fact, the Central Bank on July 23 and August 8, further stepped up its measures to control the already weakening economy. The RBI on August 14, also restricted Overseas Direct Investment by individuals and corporates to $75,000 per year from $200,000 earlier. However, the Rupee hit 65 on August 16 as FIIs perceived this as a precursor to control the failing capital. However, despite these measures, the Rupee continues to decline and interest rates kept going up. On August 20, the RBI signaled a reversal of tightening policy. According to analysts, these measures sent confusing signals on monetary policy.

7.Despite initiating FDI in various sectors, the Government also raised import taxes on gold and silver in an attempt to control the slowing Current Account Deficit. The import duty on gold was hiked to a record 10 per cent, the third such increase in eight months, while duty on silver was hiked from 6 percent to 10 per cent. The excise duty on gold bars was hiked to 9 per cent from 7 per cent. The hike in duties came after Chidambaram said the Government was looking to curtail gold imports at 850 tonnes this fiscal year, after imports of 950 tonnes in 2012.

8.In its efforts to attract more foreign funds into the country, the RBI also eased some of the rate limits for deposits targeted at NRIs, though that is also seen as unlikely to attract inflows in the near term given that their deposits have seen net withdrawals of $1.1 billion in May and June, according to DBS.

9.On 24 August, the Finance Minister during his visit to Mumbai met with bankers and FIIs assuring them that the rates will not be increased and steps to attract Dollar will be announced soon.

10.The Bombay Stock Exchange has dropped 10 per cent in the past three months and because of this, the Rupee has lost a sixth of its value against the Dollar since the beginning of 2013. To tackle the ongoing crisis, the UPA Government introduced new duties on imported television sets, raised taxes on gold and hiked deposit rates, however, but analysts say the measures are more of hasty response that shows it lacks a coherent economic plan.

Source: www.niticentral.com