The continuing slide in the rupee against dollar has raised many questions.

A leading banker who works for a foreign bank, who preferred anonymity, said, “We expected an intervention once it fell below the 55 per dollar mark. But no one came to its rescue.’’ Did the authorities want the rupee to fall to the present levels? He went on to ask.

Rupee was the worst performing Asian currency, which tanked against most major currencies including euro, British pound, Japanese yen and Canadian dollar.

If the ongoing FII selling in bond markets continues, “we expect the rupee to touch Rs 62-63 levels in near future. Moreover, a depreciating rupee can stoke inflation further, leaving very less elbow room for RBI to cut rates in its future policy meets,” said Equentis Capital in a report.

Frozen policy

The RBI, which has warned of upward risks to inflation on account of the rupee weakness, has kept on hold its indicative policy rate in the last June 17 policy meet. “We are afraid it may be forced to hold on to its rates even in the coming policy also if things do not improve on the rupee front. This, in turn, will further dampen investor sentiment and hurt stock markets,’’ the report added.

The only positive from the U.S. Federal Reserve’s plans to roll back the stimulus plan will be a fall in commodity prices, including gold, which could help to bring down India’s high current account deficit (CAD).

As the RBI said in its recently-published Financial Stability Report, outflows from equity and debt markets raise concerns about financing of the country’s current account deficit.

An estimated $90 billion is required to fund the gap in India’s balance of payments (BoP) for the current financial year 2013-14.

The large withdrawals of FII funds from the debt markets have hit the rupee hardest because India runs a large CAD. Also, a weak rupee makes investment in Indian stocks unattractive.

Manifold effect

The rupee depreciation also has manifold effect on Indian corporates that have large overseas debt burden. As most of them have un-hedged foreign exchange exposure, they could suffer increased MTM (mark-to-market) losses as the rupee weakens further.

“Rising CAD is a major concern,” said Pankaj Pandey, Research Head of ICICI Securities. In 2012-13, trade deficit stood at $196.5 billion, which was partly financed by software exports and remittances.

The current account deficit (CAD) for 2012-13 stood at $87.8 billion, 4.8 per cent of GDP.

“We have been able to address the deficit in current account by robust inflows in capital account in the form of FII, FDI and external borrowings in this period,’’ he said.

However, said Mr. Pandey, with recent depreciation in the value of rupee, the situation could worsen further in 2013-14.

-``We have already recorded gold imports of about 300 million tonnes in first two months of 2013-14 against 846 million tonnes in whole of 201-13. Crude import is inelastic and would continue to remain high. In addition to this, with imports becoming expensive, the CAD is expected to bloat further,’’ he added.

FII outflow

“We have already started to see outflow in FII investments in debt instruments. If the risk off sentiment persists, we could witness higher FII outflows from both debt and equity markets.”

In the month of June, FIIs have cumulatively sold Indian debt totalling Rs. 448110 million with net debt outflow being Rs. 331349 million.

Unlike last fiscal, capital inflows may not be able to cover India’s CAD and “any volatility in FDI and FII inflows and outflows will become crucial for the rupee.”

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