Sliding rupee

The rupee’s record plunge against the dollar puts current account deficit reduction efforts of the government in a bit of a bind.

Exports have picked up marginally since April, and further rupee slides will impact the trade and services sectors. A degree of central bank intervention through dollar-selling by state banks saved the partially convertible rupee on Tuesday, but the market is obviously not reassured. Redemptions from equity mutual funds have been on an eight-month high since May as domestic investors have pulled over $500 million from stocks. While the optimism of trade and industry that RBI will cut interest rates for a fourth time this year in mid-June comes embedded with astonishingly wishful thinking, it is a fact that risk-averse investors have been increasing their gold and debt payloads instead of moving investments into the markets as finance minister Chidambaram wants them to do. Such forex outflows have exacerbated pressure on the rupee to stay at sub-55 levels to the dollar.

The jitteriness underlying the market ensures that smooth cruising for the rupee is a far cry when a phalanx of international developments put both the market and rupee under threat in a single stroke. Independent as the rupee is on the markets, the government has no clear scheme to delink currency from market vicissitudes shaped by corporate performance and international policy. However, the rupee could be close to bottoming out for now if, coupled with last week’s increase in gold import duty from 6 to 8 per cent, a few more measures are proactively taken. The impact of the increase in gold duties on the current account deficit, is as always debatable, as it addresses only the symptoms and not the larger psychology of India’s obsession with the yellow metal. It is debatable if the rupee’s depreciation will effectively control a market riding on age-old emotions, cultural and personal.

Further slides of the rupee could also widen WPI numbers for June, besides harm further debt-raising on rupee-denominated government and corporate debt which had seen slashes in withholding tax from 20 per cent to 5 per cent recently. This, at a time, when the government is trying to raise more stable FDI inflows as opposed to FII, and when foreign institutional investors are dithering on upping their investments in core sectors like manufacturing and infrastructure. As noted earlier in these columns, the bare bones of the economy still fail to inspire. For, the rot runs deeper than a sputtering rupee.