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Economy Jul 4, 2013

Good times for the rupee are at least a year away: Poll

BANGALORE: The battered rupee will remain under pressure against the US dollar over the next year as a wide current account deficit and policy inaction dissuades foreign investment into the country, a media poll showed.

The rupee is expected to trade at 59.0 in a month and 58.0 in six months, before reaching 57.5 in a year from now. That would be just over 4 per cent stronger than the 60.0 it was trading at earlier on Thursday.

Still, that would mark only a modest rebound for emerging Asia's worst performing currency so far in 2013.

The rupee has lost over 8 percent so far this year and has practically been on a one-way street since mid-2011. It hit an all-time low of 60.76 last week.

Reuters

Reuters

The US Federal Reserve's signal that it plans to cut back on its latest stimulus spending has hurt risky assets widely across Asia but has hammered the rupee the most due to India's fiscal imbalances.

"We've been pretty cautious on the Indian rupee for a while now," said Dominic Bunning, foreign exchange strategist at HSBC.

"It is going to be difficult for Asian countries to attract foreign flows and especially for India where the current account deficit is wide which creates dollar demand."

The rupee has mostly tracked the country's current account deficit, which has ballooned to a record high of 4.8 per cent of gross domestic product in the fiscal year ended in March, driving overseas investors out of the country.

In what could be a vicious cycle, a weaker rupee will only add to concerns over funding that current account deficit, as India is one of the largest importers of crude oil and the biggest consumer of gold from abroad.

Policymakers have introduced curbs on the precious metal such as raising taxes on imports and ruling out credit, in the hopes that it will help reduce India's import bill.

The Reserve Bank of India, handicapped by meagre reserves of $290 billion, which is enough to cover only seven months of imports, has been reluctant to sell too many US dollars.

Foreign institutional investors ( FII) have pulled more than $7 billion out of Indian assets in June alone, driving stocks markets lower and hammering the currency.

And with economic growth languishing around a decade low, the chances of a attracting inflows are uncertain at the moment.

"Since growth momentum is yet to display signs of a sustained pick-up...the possibility of the rupee touching 62 in the near term cannot be ruled out," wrote economists at Yes Bank in a note to clients.

"FII inflow is likely to gather steam only when actual evidence of an improvement in domestic growth comes to the fore or if the government moves ahead with supply side reform momentum."

Foreign investment has also been limited despite the government's reforms late last year to liberalise company ownership rules in the country, but as the government gears up for an election next year, there is little room for more.

"There has been some traction with reforms and we think if those can continue to gather pace it would offset some of the weakness," said HSBC's Bunning.

Concerned about the rupee's fall, India's central bank has discreetly phoned trading desks with unusually explicit messages to cut their speculative positions in the currency.

Reuters

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