Rupee over 60: Why Indian currency weakness may be here to stay

Rupee over 60: Why Indian currency weakness may be here to stay

2:49am EDT

By Rafael Nam

MUMBAI (Reuters) – Welcome to the swinging 60s. As India’s rupee hits record lows, some investors see it headed towards the mid-60s against the dollar, a reflection of weak economic fundamentals and expectations the government will struggle to implement meaningful measures to reverse capital outflows. Domestic forwards markets, which reflect market expectations, see the rupee trading at around 65 to the dollar in a year, while offshore forward markets see it at 66. Pessimism remains even as the government is widely expected to announce steps soon to encourage more foreign inflows, including potentially raising debt abroad, after the Reserve Bank of India’s steps to drain cash from the financial system failed to prop up the currency.

“We’re very worried about the situation in India,” said Walter Rossini, who manages the 130 million euro ($173 million) Gestielle Obiettivo India Fund in Milan.

“There’s no fast fix to this situation. Probably we will see a turnaround of the economic cycle in a few quarters but rupee volatility will stay for longer. I don’t see a strong case for it coming back to the average level of last year,” he said.

The rupee hit a record low of 61.80 on Tuesday, marking a 10 percent fall so far this year – the worst performer in emerging Asia in currencies tracked by Reuters. Over two years, it is down 26 percent.

A record high current account deficit at 4.8 percent of gross domestic product has made India particularly vulnerable in an emerging markets sell-off sparked by anticipation the U.S. Federal Reserve will soon wind down its ultra-loose monetary policy.

PLENTY OF CHALLENGES

One of the first tasks confronting former International Monetary Fund chief economist Raghuram Rajan, who takes over at the helm of the central bank on September 5, will be whether to continue the RBI’s liquidity tightening steps, which have failed to stem the decline but have pushed up short-term borrowing costs, adding to pressure on the already cooling economy.

In the meantime, New Delhi is widely expected to announce measures such as raising money from Indians abroad, but emergency steps are likely to prove insufficient unless India tackles fundamental and years-old problems that deter more robust inflows from corporations and other long-term investors.

Those problems include heavy dependence on oil and gold imports, high inflation and political and bureaucratic gridlock that deter capital investment.

The task facing Rajan and Finance Minister P. Chidambaram is complicated by the ruling coalition’s weakness ahead of general elections by next May, in a global investor environment that no longer favors emerging markets.

“At the end of the day, it’s a political issue that’s really been holding back India to a large extent. Even with the right policies, if minority parties don’t support reforms, it’s going to make it very difficult for them to move forward,” said Rajiv Biswas, economist at IHS Global Insights in Singapore.

In his current role as chief economic adviser, Rajan has suggested raising money from Indians abroad or easing overseas borrowing norms – steps that would be likely to boost the rupee and bring down bond yields, at least in the near-term.

Raising interest rates, one of the traditional tools for defending a currency, might attract inflows but risk eroding confidence in an economy growing at a decade low of 5 percent.

Higher interest rates could also choke off inflows into equity markets, which have been a relative bright spot. Despite foreign exits over the past two months, Indian stocks are sitting on net inflows of $12.7 billion in 2013.

“The underlying situation is deteriorating. The economy is struggling to grow, there is a fiscal and current account deficits, and we are going into an electoral period,” said Philip Poole, global head of macro investment strategy at HSBC Asset Management in London.

“From a fundamental point of view, the currency looks cheap, but the flows in the short term are a concern. There needs to be some consistent policy coming from the government and the central bank.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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