Rupee stares at bigger slide unless fundamentals improve

Anand Adhikari, Senior Editor, Business Today

The analyst community is now predicting a range closer to the 70 level by the end of the year.

The rupee, which appreciated big time during the boom years of 2006-08, saw a strong value at 40 against the US dollar. It, however started depreciating after 2008 when the Lehman Brothers crisis hit the global financial markets. The second phase of sharp depreciation in rupee kicked off from April 2013 when the rupee was trading at 53 levels, before falling to 66 by September 2013. In fact, speculators were driving the rupee down with political instability, scams, deteriorating asset quality of banks and over-leveraged corporate sector.

That was also the time when Raghuram Rajan was brought in at the RBI as the Governor to do some firefighting. In the next couple of months, Rajan took a series of measures to attract dollars. This included allowing domestic banks to raise foreign currency deposits and also raise tier-2 capital in the form of foreign currency bonds.

These two measures, along with restrictions on gold imports which is among the two biggest import items apart for oil, helped rupee regain its lost value. The rupee managed to settle at 60 levels for the last one and a half years.

So what is pulling down the rupee suddenly? Clearly, first and foremost is the investment sentiment factor, which has turned slightly negative.

The tax issues for foreign investors are still hanging in the air. The equity markets have also started correcting after a year of new BJP-led NDA government in office.

The latest FII figures also shows a net outflow in the month of May this year. In the first four months (January -April), the FIIs pumped in a net investment of over Rs 1,000 crore in the equity and debt markets. But in May, the FIIs saw a net outflow of Rs 140 crore. Going forward, the pressure on corporate performance will also impact the net FIIs inflow into the country.

The FDI inflows have also not jumped big time on the new government's pro-industry focus and the Make in India initiative. As per available data, the net FDI equity inflows are at $31 billion in 2014-15 as against $24 billion in the previous year. The strengthening of dollar is also not a good news for the currency of emerging economies including India.

Currently, the RBI has enough dollar at its disposal to arrest any fall in rupee, though the RBI's stated policy to enter the market is to reduce only volatility than protecting a particular rupee value. But what is also important is the current government's line of thinking for a devalued rupee value to give a flip to exports and PM's make in India initiative. RBI Governor Rajan, however, defended the government's position by saying, "I think even within the government you can find all kinds of opinions. So I do not think there is a fixed opinion."

In the meantime, unless the fundamental improve substantially, the rupee will certainly be a casualty in the foreign exchange market.