Why the rupee is among the weakest currencies

The Indian rupee is one of the weakest currencies in Asia and among emerging markets. This is largely because India is a net importer of goods and services and hence has a high current account deficit. In comparison, other Asian economies like Singapore, South Korea, Taiwan and Malaysia are net exporters and maintain a current account surplus. A current account deficit occurs when a country imports more goods and services than exports.

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Here are pointers that could help you comprehend the trend:

• India imports more than exports: India's exports fell an annual 5.7 per cent to $28.7 billion in March 2012 while imports rose 24.3 per cent to $42.6 billion, government data showed on Tuesday. The trade deficit was at $13.9 billion. Oil imports rose 32.5 per cent to $15.8 billion. High imports mean more demand for foreign money. This puts pressure on the Indian rupee. Countries with a current accounts surplus have strong currencies.

• Foreign investment down: Foreign investments into Indian stocks have swung into negative with $545 million outflow in April 2012 from a robust $7.1 billion net inflow in February 2012. Foreign direct investments fell to $2.2 billion in February from $5.7 billion in May 2011. Foreign money inflows are needed to prop up the rupee. The onus is on the government to make India an attractive investment destination. 

• Forex reserves falling: The country's foreign exchange cushion is dwindling. Credit rating agency, S&P, figures India has reserves to cover about six months of current account payments, down from over eight months in 2008 and 2009. India's foreign reserves fell to around $295 billion on April 20 from about $321 billion on September 2, after the RBI sold dollars to prop up the currency.

• Scope for RBI intervention limited: “We do not expect the RBI to intervene aggressively but continue with its intervention strategy of only stepping in to curb excessive depreciation,” said HDFC Bank in a recent outlook note on the rupee. Central banks intervene in the forex markets to either prop up the local currency by selling foreign exchange or push it down by buying foreign exchange. RBI has already injected close to $ 20bn in the forex markets to prop up the rupee. While the central bank is buying rupees on one hand, it has to buy government bonds and release rupees in the banking system so that banks can lend more to stimulate growth. This nearly cancels the effect of rupee buying by RBI in the forex market.

• Rupee needs global banks to adopt easy money policy: Global central banks are not cutting interest rates or releasing money into the financial system like the so called ‘Quantitative Easing’ in US. When the US Federal Reserve Bank releases more money in the system, the risk appetite of global investors goes up. However, so far, there are no such signs. Analysts say that the reversal in global risk appetite should ensure that the rupee should move up to as high as Rs 50 to the US dollar.

(With inputs from Reuters)