There seems to be no respite in sight. Deutsche Bank said it expected the rupee to touch 70 against the dollar in a month or so. However, it expects a revival by end of year.
“We continue to believe that fundamentally the rupee is undervalued and has overshot its equilibrium level substantially, but as numerous episodes of past currency crises have amply demonstrated, under a scenario of deep pessimism, currencies can overshoot substantially and remain so for a long time,” economists at the bank wrote in the report.
The BSE Sensex and the Nifty ended at the lowest close since September 2012, down about 700 points from the day’s high. While the Sensex shut shop at 17905, down 340points, the Nifty closed down 98 points at 5302. The Sensex is down more than 7 percent so far this month.
Here are ten things you need to know about why the currency has depreciated despite RBI measures
• Last week, RBI restricted how much Indian citizens and companies can invest abroad to reduce pressure on the rupee, while targeting the current account deficit by banning imports of gold coins and medallions among other measures.
Reuters
• Efficacy of the steps remains in doubt, given outflows have already been declining this year and that they ultimately do not address the need to attract overseas investments to narrow a current account deficit that hit a record 4.8 per cent of gross domestic product in the year ended in March.
• Instead, traders fear the capital restrictions could adversely impact company profits and could lead to stronger capital restrictions that would scare off foreign investors at a time when the expected tapering of US monetary stimulus is already creating uncertainty in emerging markets.
• The intensity of the fall is surprising but the fall in itself was not surprising, said Sanjay Dutt of Quantum Securities. “Some of the measures taken by the RBI etc, haven’t seemed to have gone down well with the market participants who feel they are very inward looking and retrograde in a manner,” he told CNBC-TV18.
• ”The steps taken so far only target residents, but if this raises expectations that they could potentially resort to capital controls targeted at non-residents, that could have adverse near-term implications for capital flows,” HSBC’s Chief economist for India and ASEAN Leif Eskesen said.
“It will, therefore, be critical to tread very carefully when it comes to capital controls, to anchor expectations, and also not use it as a substitute for more appropriate and effective measures,” Eskesen said in a note to clients,” he added.
• A Reuters poll showed short positions in the Indian rupee have hit the highest in two months amid sustained doubts over policymakers’ ability to stabilise the currency. Measures to restrict capital outflows come as overseas investments from India had already been on the wane, averaging a monthly $400 million in the first half of the year from $710 million in 2012, according to DBS data.
• To prop up the rupee in the near-term, markets would need assurances that India can attract foreign flows in an increasingly difficult global environment. Foreign investors have sold a net $11.6 billion of Indian debt and equities since late May.
• The government has also raised import taxes on gold and silver in an attempt to narrow the burgeoning current account deficit. The import duty on gold was hiked to a record 10 percent, the third such increase in eight months, while duty on silver was hiked from 6 percent to 10 percent. The excise duty on gold bars was hiked to 9 per cent from 7 percent. The hike in duties came after Chidambaram said the government was looking to contain gold imports at 850 tonnes this fiscal year, after imports of 950 tonnes last year. However, as Firstpost said earlier, Chidambaram may be forced to introduce more curbs on gold if the 850-tonne limit is to be adhered to.
During the first quarter, global demand for gold fell 12 percent to 856.3 tonnes against 974.6 tonnes in the corresponding period last year. But in India consumer demand for gold in India jumped 71 percent to 310 tonnes, compared with 181.1 tonnes in the year-ago period despite repeated increases in import and excise duties by the government this year.