A little over three months, 91 trading sessions to be precise, and 23.6 per cent change in an asset. You can call that a jackpot if the change is positive. But alas, in this case it is the opposite. The asset is the Indian rupee
and the per cent change is its exchange value against the US dollar
From the year's record high of 43.95, on July 27, the rupee has dropped steadily week after week to reach 54.32 - a lifetime low.
"India is now understanding the term contagion," David Bloom, HSBC Bank's Global Head of Foreign Exchange Strategy, had told Business Today
at the end of November. London-based Bloom then said that "rupee has room to fall further, and if global growth expectations continue to decline and dollar liquidity pressures intensify…we believe the dollar-rupee rate could reach the 58-level."
Bloom's November prediction seems to be becoming a reality, partly thanks to global uncertainties which have become grimmer by the day, especially in the Eurozone. Back home, India's macroeconomic health is showing consistent signs of deterioration, evident in the statistical readings which have followed in the last two weeks, from a 6.9 per cent GDP growth in the quarter ended October 2011, to a 5.1 de-growth in the index of industrial production, or IIP, for the month of October.
Foreign Institutional Investors, or FIIs, are taking a cautious view of the Indian economy
and the Eurozone woes mean the US dollar has assumed a "safe haven" status, believes Pramit Brahmbhatt, CEO, Alpari Forex (India), one of the leading forex brokers in the country. "The non-dollar currencies have weakened," says Brahmbhatt. "Unlike last year, when the Eurozone crisis surfaced, the rupee this time has been subjected to bouts of volatility owing to the economy's weak fundamentals," Brahmbhatt adds.
For its part, the Reserve Bank of India, in end-November, announced measures to increase foreign capital flows into the country, which would be marginally helpful. The measures included a $5 billion increase in the allowable limit for FII investment in both government and corporate debt. Second, the external commercial borrowing norms were modified to allow greater capital inflow. Third, interest rates on new Non-Resident (External) Rupee (NRE) term deposits for 1 to 3 year maturity were enhanced to LIBOR + 275 basis points, from LIBOR +175 basis points earlier, while interest rate on fresh FCNR (B) deposits of all maturities enhanced to LIBOR + 125 basis points from LIBOR +100 basis points earlier. LIBOR stands for London Interbank Offered Rate which is the world's most widely used benchmark for short-term interest rates.
But the recent spate of capital liberalization measures is unlikely to have an immediate positive impact on the rupee, especially as global risk aversion and USD strength continues, according to a Deutsche bank report dated November 25. "The RBI, which had been virtually absent from the foreign exchange rate market in the last two years (marking a change in long-standing strategy), could however play a bigger role." This simply means intervention by the central bank in the foreign exchange market. But RBI officials were quick to indicate the unwillingness on the part of the central bank.
However, on December 3, in a key note address in Mumbai, Dr Subir Gokarn, Deputy Governor, RBI said; "In dealing with global turbulence and its short-term impact on India, we need to balance between the risk of a rupee spiral and that of a loss of confidence." Gokarn pointed out that RBI's capital account management framework gives it the capacity to do this and RBI will continue to use that capacity as appropriate. But then RBI has limitations of its own evident from Gokarn's acceptance that "we have to recognize that volatility may be with us for a while" and we have to deal with it. "However, if the risk of a spiral escalates, reflected in sharp movements in the exchange rate, we will take swift action as and when necessary," Gokarn reassured.
RBI has intervened in the forex markets twice in the recent past, once in September and the second time in November, but experts believe that intervention does not help in the long term. "At best, it helps to tame speculations," says Alpari India's Brahmbhatt. He cites the case of Japan, where post-tsunami the Japanese Yen had strengthened and Bank of Japan had to intervene to arrest the speculation. The move was effective. However, subsequently when the Japanese central bank intervened on at least 5 occasions, the strategy did not help. "The problems on subsequent occasions were more fundamental," says Brahmbhatt.
And the larger issue for RBI is the quantum of reserves it holds in its kitty. As of June 30, India's forex reserves are 0.996 times the total external debt which means that the total forex reserves of India are about 99.6 per cent of the total external debt. In a report dated November 30, New-Delhi based Jagannadham Thunuguntla, Strategist & Head of Research at SMC Global Securities, pointed out that in 2007-08, the total forex reserves of India were 138 per cent of total external debt. "India had buffer of excess forex reserves over and above total external debt to handle the global economic shock of 2008 crisis," says Thunuguntla. The Indian rupee has already gone below 2008 depths while the European crisis is still in early stages and has not completely unfolded. "If the European crisis completely unfolds from here, RBI may not have enough buffer to withstand the shocks on Indian currency."
By all means, this time, India has gotten caught up in the global contagion. And the rupee's new record lows against the dollar in subsequent trading sessions demonstrate this harsh fact.