The rupee, which slumped to as low as 56.38 to the dollar last week, has lost around a quarter of its value in the past 12 months and is currently Asia's worst-performing currency.
"The Indian rupee's weakness is a symptom and not the underlying problem", which is "policy incoherence, shifting global risk appetite and a comatose government", said Rajeev Malik, senior economist at independent brokerage CLSA.
Ratings agency Standard and Poor's has cut India's credit outlook to negative, growth is slowing and the current account deficit -- the widest measure of a country's trade with the rest of the world -- is at a three-decade high.
Prime Minister Manmohan Singh has admitted his squabbling Congress-led coalition must do more to get the once red-hot economy moving again.
"I will be the first to say we need to do better," the 79-year-old said as he presented his coalition's annual report card at a function last week.
Singh is credited with opening India's economy when he was the finance minister in 1991 but his premiership has been tainted by a series of policy U-turns and corruption scandals.
His once ambitious reform agenda has stalled amid coalition infighting, and the economic climate has been further strained by the announcement of new tax policies seen as hostile to foreign investment.
"India's weak national government remains the single biggest drag on activity," said Glenn Levine, senior economist at Moody's Analytics.
Now the rupee's free-fall appears to be bringing economic worries to a head.
Out of 58 economists and corporate chief executives polled, 53 said the economic situation had suddenly worsened, according to the Associated Chambers of Commerce and Industry of India (Assocham).
"The worst disaster is coming from a huge uncertainty on the rupee value and its freefall. Everybody out there in the business world is feeling shaky," said Assocham when it announced the survey at the weekend.
Many analysts are eyeing 60 rupees to the dollar as the next big mark for the currency as lacklustre US data and a worsening European debt crisis prompt risk-averse investors to dump emerging-market assets.
A falling rupee stokes India's inflation -- already running at over seven percent -- by making imports costlier and makes it harder for firms to service dollar-denominated debt.
It also deters capital inflows, making it much tougher to close the gaping current account deficit, which is already running at 4.3 percent of gross domestic product.
Analysts say India could take steps to temper dollar demand and support the rupee -- such as having the central bank sell dollars directly to Indian oil firms, which would lower demand for greenbacks in the foreign exchange market.
Fuel-scarce India purchases 80 percent of its crude from abroad, using dollars.
India could also issue bonds to non-resident Indians at attractive rates.
But the central bank "at best, can only contain the pace of depreciation somewhat, while not being able to reverse it", said Deepali Bhargava, chief India economist at Espirito Santo Securities.
Analysts said the rest was up to the government -- which needs to press ahead with long-delayed economic reforms such as further opening up the retail and aviation sectors to foreign investment.
"The government will have to restore confidence in governance... and address investor nervousness on tax issues," said private bank IndusInd's head of trading Rajeev Mahrotri.
In the meantime, global banks have been taking a knife to their growth estimates following a string of weak economic indicators.
The government has forecast growth of 7.6 percent for this fiscal year to March 2013. But private forecasters are pencilling in numbers from six to seven percent -- enviable by Western standards but not enough to reduce India's crushing poverty, experts say.
Investment house Morgan Stanley said it expects growth for the fiscal year just ended to be 6.5 percent --- lower than the government's estimate of 6.9 percent, and below even the 6.7 percent achieved in 2008-09, the year of the global economic meltdown.
COMMENTS (14)
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Modi for PM !
india is develping country and is developing with a faster rate which is shown by its economy which has left pakistan far behind .where are we standing ,there was a time when british solute our pasport .nigeria sent application to pakistan to send 1000 teachers . we were awarded title of tiger of asia .looking to the rate of development in pakistan many people thought that it would be next super power . even economy of bangladesh has left us far behind .we should keep faith in education.we should be keen about aquiring knowledge .in this way only pakistan can show progress. there is no lack of talent in pakistan and we also have every type of resources only there is lack of proper planning.it is the time to do some thing.we should do every work keeping an eye on national intrest.
@Woody: Don't know where you do your extra reading from. The UNDP link below shows India's progress in eradicating poverty just over the last 6 years (over the period from 1992 it is much more impressive).
http://www.in.undp.org/content/dam/india/docs/indiafactsheeteconomicnhdi.pdf
There are too many structural issues getting worse in India such as the deficit. Corruption has become so pervasive and huge that investors are getting wary. Just recently, Jagmohan Reddy in Andhrapradesh has been arrested for mega corruption. This scumbag has accumulated wealth of over $500 Million, all looted from the public wealth. He is just one of the large number of mega corrupt politician thieves in India.
Yep. The world bank said poverty in in India has declined only a meager 2 percent using mworld standards. But their government insists its double digits since they use 50 cents a day measuring tool instead Of $1.25 like most countries or the new mpi measure which puts Indian poverty at very high numbers. So while the Indian government insists poverty has declined, this current government of oak insists poverty has not declined and argues with world bank against their measures lol....omg for aid probably?
According to one Indian I met in London: . "In India situation is and has been bad for a common man.
We read good things in the press and were having hope from these good economic figures. We thought probably this will trickle down at some point. Now even that (hope) is lost" .
i think UPA-2 has lost the right to govern the country. Only modi can save this economy now.On a serious note, please vote for modi next time even if he is in congress.
@Meekal Ahmed: I completely agree - intervention is unlikely to have any significant impact in the current context. However, the signaling impact of intervention could help to reduce risk-averse capital flight to some extent. Some of this is also due to current policy; while structural reforms haven't take place, regressive steps such as the retroactive tax have spooked investors.
now the troll of indians(or fake pakistanis _) comes and satisfy themselves and other indians about their declined economy...
@BlackJack:
It is usually not a good strategy to intervene if the decline in the exchange rate has structural roots. Intervention is fine to smooth out temporary "market disturbances".
It is game dear
There are 2 parts to the rupee decline - one is the 'policy paralysis' from the current regime that has managed to enter the lame duck phase before half its term is complete; the other is the global situation where capital is becoming increasingly risk averse and taking refuge in the US dollar. Both together make a lethal combination because the decline in currency value is not benchmarked to the economy alone and can hit alarming lows if the Central Bank chooses not to intervene. Tough times ahead.
waiting for Indian rupee to depriciate more, so that visiting india will be cheaper for us Pakistanis.
India should learn how to fail properly from Pakistan. 6.5% growth rate is not low enough. They should try going for 2-3% range like us lol.