Rupee Falls to its Lowest Level Since December

RBI cushions slide as currency ends 0.9% lower on fading hopes of policy action

The rupee fell to its worst levels since December, amid waning hopes of policy makers setting the house in order. Rupee's slide in December had triggered the worst curbs on currency trading in more than a decade. The currency fell 0.9% to . 53.40 to the US dollar on Thursday, the worst closing since mid-December when it touched a life low of . 54.30. 

The RBI intervened to smoothen the fall when it was trading between 53.20 and 53.41, said traders who did not want to be identified. "It was a unidirectional movement in the rupee, driven by the same old triggers of worsening twin deficits, tanking stocks and considerably reduced fund inflows," said Navin Raghuwanshi, assistant vice-president at Development Credit Bank. 

Net foreign fund outflows in April that reversed the record inflow of the first quarter, rising imports while exports falter due to dimming outlook in Europe, and overseas loan repayments have made experts to forecast that ruppe may touch a new low. With the Reserve Bank of India's lowering of interest rate feeding demand, further depreciation could re-ignite inflation. 

"The risk of balance of payments stress remains high," said Chetan Ahya, economist at Morgan Stanley. "Unless the government initiates major policy action to cut its spending (including subsidies) and/or international crude oil prices decline sharply due to improved outlook of global supply, India will remain exposed to any potential slowdown in capital inflows, increasing pressure on the exchange rate, which, in turn, could quickly result in a rise in the domestic cost of capital, hurting growth further." 

India's trade deficit hit an alltime high of $185 billion last fiscal, and balance of payments turned negative in the third quarter for the first time since Lehman Brothers' collapse. But hopes of reforms drew in record funds in the first quarter, but that's waning. In April, foreign institutional investors sold assets worth . 1,675 crore in debt and equity. 

Citigroup forecasts the rupee at . 54 to the dollar, while BNP Paribas estimates it at . 55. "The rupee looks increasingly helpless," Dariusz Kowalczyk, a strategist with Credit Agricole in Hong Kong has said. "RBI must be nervous about the inflationary impact of the depreciation."