The INR weakening is more due to USD strength than policy issues. The government and RBI should let the INR run its course rather than taking knee jerk actions at lower levels. The economy will benefit from an INR that is behaving in line with current fundamentals and there is no reason to believe that the INR will not rise going forward as the economy corrects and stabilizes.
The sharp fall in the INR to the USD over the last couple of weeks has raised questions on what the government or the RBI can do to prevent the fall. The INR has fallen by over 5% month on month and is trading just off a percent from record lows and given weak equity market sentiments with Sensex and Nifty down 3% from highs over the last fortnight and with economic data from GDP growth to PMI coming in negative, the INR may see fresh record lows.
GDP growth for the full year 2012-13 came in at decade lows of 5%. Manufacturing activity in May 2013 shrank for the first time in four years while vehicle sales for May was weak with the country’s major car producer Maruti showing a decline in sales.
India’s weak economic data was in contrast with growing strength in the US economy. US home prices for March 2013 rose by the highest level since 2006 while consumer confidence for April was the highest since 2008. US is becoming energy sufficient with shale oil production bringing down oil imports with imports for March 2013 dropping 15% year on year. US economy is adding jobs on a month on month basis, the country’s tax revenues are increasing leading to budget deficit projections for fiscal 2013 being cut by USD 200 billion from USD 845 billion to USD 642 billion in just over a three month period.
The USD index has strengthened by 13% from lows seen in April 2011 indicating a broad USD strength against majors. Improvement in job market for May will heighten bets of the Fed easing off on its bond purchases leading to a further strengthening of the USD.
The INR fall is more to do with USD strength than domestic issues. The government is doing its bit in lowering fiscal deficit from levels of 5.9% seen in 2011-12 to 4.8% levels for 2013-14. Inflation as measured by the WPI has come off from close to double digit levels to less than 5% levels over the last couple of years. FII limits in debt have been increased two fold and FII flows in debt and equities have been robust at around USD 30 billion for fiscal 2012-13. FII’s continue to buy domestic debt and equities in fiscal 2013-14 with purchases amounting to USD 6.9 billion in the April-May period.
RBI has cut the repo rate by 125bps over the last one year and ten year government bond yields have dropped by 125bps over the same period.
Current account deficit (CAD) is trending at higher levels and is expected to close fiscal 2012-13 at close to 5% of GDP, highest on record. However CAD is being fully financed by capital flows and hence that is no source of actual weakness in the INR apart from being sentiment negative.
Commodity prices are down globally with oil and gold prices 9% and 13% respectively since the beginning of April 2013. Falling commodity prices helps lower subsidy bill as well as trade deficits.