What is the future of Indian Rupee?

Aug 20

Having breached an all-time low, what’s next for the Indian rupee?

The rupee’s sharp losses in recent weeks have underlined how vulnerable the currency is – and raised questions about its future. While India’s central bank has said it will take steps to curb further losses, analysts now increasingly believe that the Reserve Bank of India doesn’t have much firepower left.

This means the rupee is likely headed lower.

Over the last week or so, the Indian rupee has been losing value primarily because global investors are becoming more risk averse as they worry about the fate of the Eurozone. “There’s a desire to move back into the most liquid currency,” meaning the U.S. dollar,  says Dominic Bunning, associate FX strategist at HSBC in Hong Kong. That has pushed up the value of the U.S. dollar against other currencies.

While this has hurt currencies throughout Asia, the Indian rupee has had a steeper fall, largely because of a host of macro-economic problems specific to India.

This stems from factors including India’s high current account deficit, lack of foreign capital flows, high inflation and failure to push through much-needed economic reforms.

And there is only so much the central bank can do to help the rupee. For instance, India’s current foreign exchange reserves are enough to pay for six to seven months of Indian imports. Just a few years ago India’s reserves could cover a year’s worth of imports.

Ritika Mankar Mukherjee, an economist at Mumbai-based financial services firm Ambit Capital who has studied the Reserve Bank of India’s currency interventions since June 2004,  and found that intervening in the currency market alone didn’t help the rupee much.

The balance of payments – which reflects India’s monetary transactions with the rest of the world – is eight times a “more powerful driver” of rupee movement, Ms. Mukherjee said in a recent research report. She believes India’s balance of payments is going to get worse.

Ms. Mukherjee projects that the pace of India’s export growth is going to slow down. This is mainly because of the poor economic climate in Europe, a region that accounts for one-fifth of India’s overall merchandise exports.

Another reason for a slowdown in export growth, says Ms. Mukherjee, is that it has been exaggerated in the past. In calendar year 2011 – when export growth from major Asian countries like China, Japan, Singapore and Indonesia fell –India’s exports grew at the same pace as they had a  year earlier.

As per our view,there will clearly be pain if you are investing in Indian Rupee. So keep your investments in US Dollars or  in Dhs.

 

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About the Author

Amit is an Independent Financial Advisor, based in Dubai since 1997. He is part of the prestigious ‘Million Dollar Round Table’ (MDRT), which is an elite club of the best financial advisors worldwide. He has authored the ‘6-Step Financial Success Guide’, and the book ‘Creating, Preserving, Distributing Wealth’. He helps business owners and professionals ‘Create A Second Income’ through investments.

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