Rupee skids to 56 versus dollar; more falls seen

MUMBAI Wed May 23, 2012 7:59pm IST

1 of 6. People walk past a roadside currency exchange vendor in the old quarters of Delhi May 22, 2012.

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MUMBAI (Reuters) - The rupee slumped to another record low against the dollar on Wednesday, ratcheting up pressure on policymakers to restore confidence in the currency at a time when appetite for risky assets is ebbing around the world.

After the markets closed, the government announced that it will allow state-run companies to raise petrol prices, a measure that on its own will have negligible fiscal impact but that is at least seen as a signal that India could begin to look at fuel reform - a key concern for investors.

But without government action, analysts saw no near-term catalysts to revive the rupee, which on Wednesday fell beyond the symbolically significant level of 56 to hit a record low of 56.225 to the dollar.

Traders said it could weaken further to 57, extending a drop of more than 13 percent from its yearly peak in February.

"This step is just a flash in the pan and does not change the fiscal figures," said Indranil Pan, chief economist at Kotak Mahindra Bank.

"So I don't see any positive impact on rupee from this development. Only if diesel, LPG, kerosene prices are increased it will have implications on the fiscal figures,"

Global risk aversion due to the crisis in the euro zone has exposed India's vulnerabilities, most prominently a current account deficit that reached 4.3 percent of GDP in the December quarter. The economy depends on capital flows to bridge the gap.

Worries about the government's ability to fix its finances have also weighed heavily on the rupee, as investors worry the government will overshoot its deficit target of 5.1 percent of gross domestic product for the fiscal year ending in March 2013.

Easing the government's fuel subsidy burden has been seen as a key step, despite the potential inflationary impact.

Other factors that have made the rupee Asia's weakest-performing currency this year have included sluggish policy reforms and a recent controversial tax proposal on foreign investment.

"India is one of those odd cases where the bottom-up corporate environment is very strong, but it is challenged by poor politics and macroeconomic policies," said Pranay Gupta, Asia chief investment officer for Lombard Odier.

The political will to take tough steps to put Asia's third largest economy back on a firm growth path was lacking, he said.

'TIME TO PANIC'?

Wednesday marked the sixth consecutive session in which the rupee has hit a record low against the dollar. It recovered slightly to close the day at 55.9950/56.0050.

Non-deliverable forwards are pricing in more weakness, implying levels of 56.46 in a month's time and 57.25 in three months. Citing technical chart analysis, Standard Chartered said in a report on Tuesday the rupee could fall to as low as 58.62.

Given the absence of government measures, traders have focused on steps the Reserve Bank of India could take.

However, after intervening earlier this month, the central bank has turned cautious on selling dollars because global risk aversion is undermining most emerging market currencies.

Traders estimated the RBI sold $100-$250 million earlier on Wednesday in its first intervention in three sessions. But the amount was too small to stem the rupee's fall.

The central bank has taken several measures to try to stem the rupee's slide, including raising deposit rates for non-resident Indians and forcing exporters to convert half of their foreign currency holdings into rupees, but to no major effect.

The RBI could do more, such as selling dollars to state oil importers, which Nomura argues would reduce dollar demand in the currency market by $8.8 billion per month.

However, the central bank is seen mindful that its foreign reserves total nearly $292 billion, enough for roughly six months of imports, down from $320 billion in October.

Instead, analysts say that the best defense for the rupee rests with the government, which they say needs to implement more confidence-boosting measures about its finances and stimulate investment.

"It is the time to press the panic button," said Rupa Rege Nitsure, chief economist at Bank of Baroda.

"The government has to do something right now to reverse investor sentiment, so that India can start attracting capital inflows," she added.

Morgan Stanley downgraded India's economic growth forecast for 2012 to 6.3 percent this week, below the levels of the Lehman crisis, citing the government's propensity for fiscal policies that support consumption at the expense of private investment.

At least for now, foreign investors have not yet staged an exodus from Indian markets. Though they sold a net $930 million in debt and stocks in April, they are slight buyers in May as of Tuesday and significant net buyers in the year to date.

(Additional reporting by Subhadip Sircar and Charmian Kok; Writing by Rafael Nam; Editing by Tony Munroe and Sanjeev Miglani)

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