Economists Expect Short-Term Rupee Stability

The Indian rupee is not expected to fall further in the short-term, according to a majority of economists surveyed by the Confederation of Indian Industry (CII), Rapaport reports. However, the group expects the currency to maintain its current rate of INR 53 to INR 55 against one U.S. dollar in the long run.
The rupee declined by 25 percent through the year to June 30, 2012, outpacing losses experienced even by the troubled euro and British pound currencies, CII stated. The rupee fell by 9.1 percent during the quarter that ended June 30, 2012, CII added.
“This impacts economic confidence, builds up inflationary pressures, and hits industry through rising import costs. The high volatility in the rupee has added to the complexity of [doing] business in the country,” said Chandrajit Banerjee, director general at CII. “The government and the Reserve Bank of India (RBI) need to tackle the underlying macroeconomic problems that lie at the root of the fall in the rupee in order to provide some stability to business conditions.”
Respondents in the survey pointed out that the high current account deficit, policy inaction and high fiscal deficit were the main factors for the rupee’s decline.
Of the 35 economists surveyed, 60 percent said they expect the rupee will remain at current levels in the medium-term, while 40 percent forecasted a possible further slide in the exchange rate. A majority of respondents felt that the situation would remain volatile until the end of September 2012.
There was greater divergence in their expectations for the rupee rate come December with 40 percent predicting the currency to be at INR 50 to INR 52. About 30 percent of respondents said they expect a rate of INR 55 to INR 58, while 20 percent forecasted a level of INR 53 to INR 55.
The survey noted that underlying macroeconomic problems lie at the root of rupee depreciation. The group stressed that government and the RBI need to address these fundamentals for the longer term rather than taking only short-term steps. Some of the suggestions forwarded included to: review the government’s foreign direct investment policy in critical sectors, paying oil companies directly from currency reserves, the issuance of dollar-denominated bonds, and a further increase in foreign institutional investment (FII) limits in the Indian debt market.