Indian Rupee Continues To Be Volatile, Dips To Four Month Low Due To Trade Deficit And Strong Dollar

Indian rupee dropped to a four-month-low of 53.83 at midsession before closing at 53.41/42 against the dollar Friday, despite the Reserve Bank of India's suspected interventions.

The rupee has been continuing its steady fall and the analysts are expecting the Indian currency to touch an all-time low of 55.00 per dollar in a short period.

The rupee has lost nearly 7 percent since February end and 14 percent from the range of 48 per dollar three four months ago.

Analysts point out a number of reasons for the rupee's dramatic fall in recent weeks.

Trade deficit: Country's widening trade gap is considered as one of the strong reasons for the fall of the rupee. India's trade deficit for fiscal 2011-12 stood at a record high of $185 billion - nearly 55 percent increase over the deficit in 2010-11.

We all know the current account deficit problem, the trade deficit problem. Even seasonality is bad during this period of the year and we need FII flows, but FII flows have dried down over the past month. So that is putting the rupee under pressure, Vivek Rajpal, rates strategist, Nomura India, was quoted as saying by The Economic Times.

Strong dollar is another factor that has contributed to the depreciation of Rupee. The increased demand from importers further added pressure on the rupee. The dollar has been particularly strong in global markets broadly in last few months.

Taxation worries: Lack of clarity over taxation has created worries among foreign investors and has impacted fund inflows. Analytics point out that the impact has fallen heavily on the rupees too. If the government doesn't clarify the confusions, it will further weaken the rupee.

If the rupee breaks 53.50 per dollar level, the next level will be a lifetime low of 54.30 per dollar. The resistance level for the currency is seen at 53.50 per dollar, I think it's very important that we get clarifications around the General Anti Avoidance Rule or GAAR [General Anti-Avoidance Rule]. If they think that it is very difficult to live with, there is uncertainty and that's what curbing inflows is at the moment, NDTV Profit reported quoting Agam Gupta, MD- Head of FXRC Trading - India at Standard Chartered, as saying.

Indian Finance Minister Pranab Mukherjee Thursday told reporters that the volatile global commodity prices were responsible for the stress on rupee. In several Asian countries, excepting China, the BoP is under stress which leads to currency depreciation, Mukherjee was quoted as saying by Business Line. Deteriorating balance of payment (BoP) situation in several Asian countries also put stress on currencies, he added.

RBI Intervention: Though there was strong suspicion of direct interventions from RBI to stabilize rupee, among the dealers, media reports said that RBI interference could not be independently verified.

Analytics believe that though RBI might interfere to make slight corrections in the Forex trade but such interventions might only have a temporary effect.

Analysts point to the RBI's direct intervention between November 2011 and January 2012 to prove their viewpoint.

According to a First Post report, the RBI had sold around $20 billion between November 2011 and January 2012 period to defend the rupee, which fell to 54 on the back of risk aversion due to Eurozone sovereign debt woes. But RBI's interference affected the liquidity from the domestic system, forcing the central bank to cut the cash reserve ratio to reduce the liquidity deficit.

Forex dealers believe that the RBI, therefore, will allow the rupee to take its natural course and stabilize on its own.

On the other hand, a depreciating rupee is impacting dearly on India's imports and the first casualty being the crude imports. India depends on imports to meet 80 percent of its domestic crude oil requirement. The state owned oil companies are bearing the brunt now and the impact is expected to trickle down to multiple sectors, once the government decides pass it on to the consumers, further worsening the inflation.