RBI: Have to live with choppy rupee for long
Nov 21 2012 , Mumbai, Bangalore
Inflow of FDI, FII, ECB, NRI deposits slow down
A senior RBI official said the volatility would continue for a sustained period as the fiscal situation had worsened and the reform measures had not really taken off.
“The rupee appreciated after the reforms announcement by the government; then it began to depreciate after Greece said it could not stick to repayment obligations,” the official said.
Since April, the rupee has fallen by 4.04 per cent and was at Rs 55.13 to the dollar on Wednesday, a two-and-a-half-month low. On October 5, it had appreciated to a high of Rs 51.37.
In all of 2010-11, the currency had appreciated by 1.1 per cent, but thereafter slid by more than 12 per cent in 2011-12 in the wake of the European crisis. Between August 8 last year and August 14 this year the rupee depreciated by nearly 19 per cent.
Jamal Mecklai, CEO of Mecklai Financial, said: “The volatility of the rupee will be sustained because the problems in the euro zone will continue for a while and domestic growth is also muted.”
The weakening of the rupee since April is due to our widening trade deficit, disappearing capital flows due to policy uncertainty on general anti-avoidance rules (GAAR) and a worsening economic situation in the euro area.
Added to this is risk aversion. Capital flows in the shape of FDI investments, FII flows, ECBs and NRI deposits have already begun slowing. The net FDI in April and September this year was $12.8 billion, $2.5 billion less than that in the same period last year.
Non-resident foreign currency deposits actually saw a $184 million drop (against net inflow of $227 million in the corresponding period last year). Similarly, the average monthly inflow of ECBs was down to $300 million till September, a third of that a year ago.
In April, the rupee actually appreciated after dropping to as low as Rs 57 in December. Traders say these lows will most likely be revisited, partly due to fundamental factors. The current account deficit is expected to widen to over four per cent of GDP in the second quarter.
Morgan Stanley economist Chetan Ahya said, “Any sign of risk aversion in the global financial market translates into funding risks for India, leading to volatility in exchange rates.”
Subir Gokarn said at the RBI-ADB conference on Tuesday, “The rupee appreciated by 5.2 per cent in September alone, driven by both global developments and reform measures announced by the government that led to improved investor sentiment and measures announced by RBI.”
By the second week of October the rupee weakened due to rising demand of oil importing companies for dollar funds, fresh concerns in the euro area and fears of uncertainty over implementation of domestic polices.
That fact that the inflows are likely to remain volatile was also apparent from widening forward premiums in the forex market. One-month forward premiums (that importers pay for hedging their payments) rose to seven per cent.
At September end, after FDI limits were relaxed, the forward premiums had dropped to six per cent. The rising premium implies that exporters are holding back bringing in their incomes in anticipation of the rupee further depreciating.
Infosys’ former CFO and current head of the BPO, Finacle and India business, N Balakrishnan, said, “I don’t see any triggers for rupee appreciation in the short term expect government action to augment capital flows.”
The rupee depreciation should technically benefit IT companies, but most of them are cautious about the effect of currency volatility. Infosys has a hedge position of about $1.1 billion and Wipro about $1.8 billion.