The Indian rupee slumped to a record low beyond 52 to one US dollar this week. It has declined by almost 20% against the greenback since early August and by 15% throughout this year. Of all the emerging market currencies, only the South African rand and the Turkish lira have performed worse in 2011.
What the commentators said
One reason for the decline is that India's economic fundamentals have weakened. The central bank has cut this year's growth forecast to 7.6%, which would be the lowest figure in two years. Inflation is stubbornly high despite 13 interest-rate hikes since early last year. Its persistence has prevented monetary easing to prop up growth. Government foot-dragging over key fiscal reforms is also undermining confidence, noted Neil Munshi on Ft.com.
The main problem, however, is global sentiment, said Capital Economics. Capital is flooding out of emerging markets as global risk appetite has declined amid the euro crisis. Foreign fund flows into the equity market have always been closely correlated with the exchange rate, as foreigners own a large chunk of the market.
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In recent months there have been huge outflows. India is unusually vulnerable because, unlike most Asian economies, it has a current-account deficit. This has to be plugged with foreign money. So "the rupee is being swept by a self-fulfilling squeeze", as Sean Callow of Westpac Bank put it. Global risk appetite will continue to affect the currency, but it is now widely deemed undervalued, noted Reuters.com.
Given India's "strong underlying story", there is plenty of scope for a bounce once global investors feel bolder. Its fall may not be over, agreed HSBC Global Asset Management. But at this level, the currency is "an attractive proposition".
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