Sentiment looks negative until some genuine efforts come from the government to bring in large capital inflows

The rupee is likely to weaken further on a host of issues which would plague the economy in the coming days as the 2014 election year approaches, according to market players.

The rupee declined by 21 per cent from 44.5 a dollar in August to 54 in December 2011. Even though it recovered to 52 to a dollar level in January-March 2012, it again slipped to 53 level in April.

“The future sentiment of rupee looks negative until some genuine efforts come from the government to bring in large capital inflows,” said K. N. Dey, Director, Basix Forex. There is likely to be considerable capital outflow by means of external commercial borrowing (ECB) repayment and foreign currency convertible bond (FCCB) redemption between June and August. “This will add more pressure to the rupee in the coming months until and unless India sees some fresh capital inflows to equate this outflow,” Mr. Dey added.

The rupee closed at a four-month low of 52.96/97 a dollar on Wednesday, after touching an intra-day low of 53.02, as compared to its Monday's close of 52.73/74.

Till mid-December 2011, the European debt crisis was disturbing the rupee's stability and now, domestic issues are troubling it.

The rupee's unabated fall from August 2011 was checked by the RBI's December 15, 2011, notification which reduced the overnight limit of foreign exchange held by banks, while stopping the speculative activity.

The risk management norms aided with the regular intervention of the RBI, in a volatile foreign exchange market, brought the rupee back to around 48.60/70 levels from its weakest level of 54.20.

Current account deficit

“A widening current account deficit coupled with a non-conducive environment for capital flows would lead to a persistent drawdown in reserves and pressure on the rupee. As a result, our global foreign exchange team expects the rupee to depreciate over 6-12 months to 54 a dollar,” said Rohini Malkani, Economist, Citi India.

There has been a steady decline in foreign currency reserves since last two years. Fresh reserves can only be created by surplus capital flows. “RBI has been intervening less actively in the foreign markets than in the past,” said Rohini Malkani. Compared with about $20 billion of dollar-selling between October and December 2011, intervention is now considerably lower.

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