Why the rupee may fall to 70 against dollar
The Indian rupee improved stridently on Tuesday after key regulators took steps to restrain speculative trading in the currency, but some gains were knocked off in minutes and the currency was back below the psychological barrier of 60.
The principal problem seems to be India’s huge current account deficit, which hit a record high 4.8 per cent of gross domestic product in fiscal year 2013.This deficit was being financed by foreign money for last many years, but as the U.S. economy gathers momentum, there is increasing likelihood that the Federal Reserve will taper its bond buying programme (also called quantitative easing) as early as September.
The government’s decision to hike duty on gold, the second biggest import item, has helped cut imports by 81 per cent in June from the previous month. However, if FIIs continue to pull out, the government will have to come up with new plans.
The Reserve Bank, too, lacks fire power because it has foreign exchange reserves to cover imports for seven months only. The central bank’s many interventions so far have miserably failed to stop the rupee from posting record lows nearly every week.
The message is loud and clear. Unless more concrete steps are taken to address the fundamental problems plaguing the rupee, the currency will continue its slide on a one-way street.