The rupee was Asia's worst performing currency in 2011
INDIA’S rupee hit a record low against the dollar on Wednesday (May 16) and stocks fell nearly two per cent, as uncertainty over the eurozone debt crisis and weak domestic indicators hit Asia’s third-largest economy.
The Indian unit fell to 54.43 rupees to the dollar in early afternoon, breaching its previous intraday lifetime low of 54.30 struck on December 15.
Traders said they expected the rupee to fall further in coming days with risk aversion hitting global markets and sentiment souring about India because of its ballooning fiscal deficit, slowing economy and political logjam.
“Global uncertainty is in the driver’s seat,” said Priyanka Kishore, forex strategist at Standard Chartered Bank. “There is a tangible risk of the rupee moving towards 55 rupee to the dollar levels,” she told reporters.
The Indian currency has fallen more than 10 per cent since March despite persistent interventions from the central bank, which has regularly bought dollars and only last week announced new measures to support the local unit.
Exporters and other foreign-exchange earners were ordered last Thursday (May 10) to convert half of their total foreign-exchange earnings kept in banks into rupees, but the move failed to prevent the decline.
Amid the turmoil, the benchmark Bombay Stock Exchange’s Sensitive Index or Sensex was down 1.89 per cent or 308.54 points at 16,019 in early afternoon trade.
Investors across Asia have been dumping risk-sensitive assets on worries about the worsening political upheaval in Greece and buying up dollar holdings, perceived as safe havens in times of financial stress.
But India’s domestic problems have added to the woes, analysts say, namely slowing growth, rising inflation, strained public finances and widening trade and current account deficits.
Foreign investors have also been turned off the country of 1.2 billion people due to recent regulatory moves by the government, which has also stalled on a pro-growth reform agenda.
The falling rupee is bad news for India’s economy, pushing up import prices and aggravating inflation that is running at over seven per cent, limiting the central bank’s scope to roll back interest rates and spur the economy.
It will also further strain the government’s budget because oil imports - which are priced in dollars - will become more expensive.
Finance minister Pranab Mukherjee already sees a fiscal deficit in 2012/13 of 5.1 per cent of gross domestic product (GDP).
The rupee was Asia’s worst performing currency in 2011, losing more than 20 per cent of its value against the dollar in the calendar year.
The central bank said recently it had spent more than $20bn (£12.56bn) in spot-market intervention between September and the end of February.
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