Taking a hit: Indian rupee a victim of global turmoil

Currency among the weakest performers in the region.

NEW DEHLI: India’s rupee has slid nearly 10 per cent in three months against the dollar, a consequence of global economic uncertainty that will stoke already high inflation in Asia’s third-biggest economy.

“The last thing India needs now is imported inflation,” Biswajeet Dhar, head of Research and Information Systems for Developing Countries, a Delhi think-tank, told AFP. “We’re walking into a phase of even higher inflation.”

In the three-month financial quarter to September 30, the currency has fallen by about nine per cent to 48.9 rupees to the dollar as investors fret about Europe’s spiralling debt crisis and the sputtering US economic recovery.

It has been the biggest quarterly drop by the rupee since the collapse of Lehman Brothers in September 2008 triggered the last global financial crisis.

The slump comes at a bad time for India, with economic growth slackening as a result of a dozen interest rate hikes in 18 months to curb inflation, already the highest among major global economies at 9.78 per cent.

“Until global commodity prices come down, every (downward) move in the rupee adds to imported inflation,” Priyanka Kishore, a currency strategist at Standard Chartered Bank, told AFP.

Already, Indian state-run oil companies have hiked petrol prices by five per cent to offset the effects of the rupee’s decline.

The government originally projected growth of around nine per cent for this year, up from 8.5 percent last year. Now Finance Minister Pranab Mukherjhee says he expects growth to be around eight percent and that is far above forecasts by private economists who see expansion in the seven percent range.

Central bank governor Duvvuri Subbarao says even with growth slowing, there is pressure for more monetary tightening to dampen inflation which is well above the bank’s comfort level of six percent.

“Above a (certain) threshold, you can’t accept high inflation to have higher growth,” Subbarao says.

The central bank has held back from intervening in a major way to support the rupee, preferring to hold on to its foreign exchange reserves which are just a tenth of neighbouring emerging market giant China’s.

Foreign inward investment inflows so far this year have totalled $5 billion, less than a quarter of the $22 billion for the same period in 2010.

Weak local share markets - which have slid more than 20 percent so far in 2011 - have put additional pressure on the rupee as overseas funds sell Indian stocks. In August, foreigners dumped $2.1 billion in shares, the largest monthly outflow since October 2008.

There is a silver lining in the rupee’s fall for India’s flagship software industry, which makes two-thirds of its sales in US dollars and whose earnings, translated back into rupees, should be higher.

But companies which have borrowed in dollars, taking advantage of low interest rates abroad, are suddenly finding the rupee value of their loans much higher.

The rupee has been among the weakest performers this year of the major Asian currencies, which also have been hit by sharp outflows in foreign funds.

Standard Chartered expects the Indian currency to be even lower at 51 rupees to the dollar by the end of the year.

Published in The Express Tribune, October 3^rd, 2011.