Dollar Woes - Rupee breaches the 52 mark

After breaching the Rs 51 mark on Friday, the rupee has not only managed to break past its all time low of Rs 51.97 but has also crossed the Rs 52 mark and continues to fall as we speak. Unconfirmed reports that RBI had intervened by selling dollar at Rs 51.79 to arrest this free fall also failed to have any impact on its steep movement past Rs 52 per dollar.

Global risk aversion and India’s widening current account deficit have been cited as the man reasons for dragging the rupee past its all-time low levels against the dollar.

Today at Rs 52 per dollar the rupee has lost over 16 per cent on YTD basis which is its third worst fall over the past two decades. In comparison the SENSEX today stands at negative 22 per cent. If compared over the period of the past two decades, the dollar has appreciated by around 3 times while the SENSEX has shot up by 15 times its value in 1990.

If we look back into the past, the previous two occasions where the rupee witnessed sharp erosion were in the year 1991 and 2008. While the sharp fall of 42 per cent seen in 1991 can be attributed to the introduction of the New Investment Policy that in the year 2008 was a result of the global recessionary concerns.

In 1991, rupee was de-controlled by the RBI and it was decided that the dollar movement would be decided by the economics of demand and supply. Hence the rupee weakening back then was more of a correction in price than a result of any impending economic crisis. One can also take cues for the fact that the SENSEX gave a 94 per cent return that year.

In case of 2008, as we all know, the sub-prime mortgage crisis led global recession resulted in a sharp weakening of the rupee and India Inc. saw a 24 per cent depreciation in rupee. In comparison the SENSEX had whooping 52 per cent wealth erosion and fell below the 10000 mark.

Though we had managed a bounce back with the SENSEX touching its all time highs in the Diwali of 2010 and the rupee silently inching back to the Rs 44 per dollar levels, a sudden and unprecedented downgrade of the US economy by S&P coupled with the never ending euro zone debt crisis triggered a fresh sell-off in the markets which led to another sharp fall in the rupee.

This time round, the concerns surrounding a weak rupee are not only from the global front, but also from the domestic front. India Inc. currently faces itself with a number of headwinds and hurdles which threaten the possibility of a come back in the near future.

One of the chief reasons for the sharp slide in rupee is a persistently high inflation which has led to a series of rate hikes by the RBI resulting into low investment growth and a muted set of corporate earning. As a result the FII’s have shunned equities and pulled off their capital from the markets. This has led to a net outflow of FII investments and as such resulted into a fall in rupee value. According to data from SEBI, as against a net inflow of Rs 133266 crore seen in Indian equities in CY2010, FII investment currently stand at negative Rs 291 crore for CY2011. With the economy pegged to grow at just 7.5 per cent in the current fiscal, coupled with the over-shooting fiscal deficit target it would be a quite some time before FII show interest in our markets again.

Moving on, we have observed that India remains a net importer of foreign goods, and a third of that consists of oil imports with oil companies importing around USD 6 billion worth of crude every month. A falling rupee has led to an increase in the cost of imports (in local currency terms), widening our current account deficit. The current account deficit which can be funded either through FDI or FII (in equity/debt markets) also seems impossible in the current situation as foreign investments in local assets such as stocks have been low.

In conclusion, as most of the above mentioned concerns are likely to play on for a while and only fade out over a considerable period of time, we believe the dollar woes that the investors face will continue to worsen.

Also an important fact is that right now there is no other asset class that has the ability to catch the fancy of investors and result in them shunning dollar.