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Rupee Weakens; Calls Grow For Fuel Price Hike

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The rupee slid a little closer on Tuesday (3 September) to a record low struck against the dollar last week, as share markets weakened and investors remained doubtful whether the government would act decisively to restore confidence in the economy.

With crude oil prices rising due to fears about a potential US military strike on Syria, economists have called for an increase in subsidised fuel prices to help address concerns over a record high current account deficit and a fiscal deficit that is among the highest of all the major emerging market economies.

Markets are keenly waiting to see how former International Monetary Fund economist Raghuram Rajan will handle the defence of the rupee once he takes over as governor of the Reserve Bank of India on Thursday, having previously beeen an advisor to the finance ministry.

As elsewhere, traders were also cautiously waiting for US jobs data due out on Friday (31 August) that could effect expectations about when the Federal Reserve will start tapering its monetary stimulus. The prospect of less easy money from the United States has caused a exodus from many emerging markets over the past few months, but India has fared worse than most because of its precarious deficits.

The RBI's rupee defence has so far rested largely on draining money markets, but the rupee has still lost over 19.5 per cent against the dollar since the slide began in early May, and higher short term interest rates have raised borrowing costs for struggling corporates at time when the economy's slowdown has become more acute.

The partially convertible rupee traded at 67.20 per dollar by afternoon trade on Tuesday (3 September), weakening from its close of 66.00/01 on Monday (2 September), and not far from the record low of 68.85 hit on 28 August.

The rupee was impacted by gains in the dollar on international markets and falling domestic shares.

The broader Nifty fell more than 2 per cent on Tuesday (3 September) on profit-taking snapping a three-session winning streak to Monday when it ended at a 2-1/2 week high.

Technicals suggest the rupee could fall further after a period of relative range-bound trading since striking the record low last week.

Offshore traders see the rupee staying near the record low with one-month contracts for non-deliverable forwards trading at 68.30.

India is suffering from a dearth of investment, and the measures taken by the government so far have failed to convince investors to put more money into an economy, which is growing at a dangerously slow pace given India's demographics.

Subsidies
With a national election due by May, there are doubts whether Prime Minister Manmohan Singh's minority government would be ready to take unpopular steps like raising subsidised fuel prices. Earlier this week, lawmakers derided a proposal from Oil Minister Veerappa Moily to close petrol pumps at nights.

India has unveiled measures to curb gold imports and announced gradual diesel price hikes, but economists say more are needed.

"Small hikes in fuel are not going to make up for the losses of oil companies. The government will have to raise prices to send a clear signal to investors, because if they do not meet the fiscal deficit target, it will be negative for the economy," said Rupa Rege Nitsure, chief economist at Bank of Baroda.

Data released on Friday (30 August) showed the economy had grown by a worse than expected 4.4 per cent in the April-June quarter, adding to fears that growth this fiscal year will come in below the decade low growth of 5.0 per cent notched in the fiscal year that ended in March.

Investors worry the government is more focused on expensive, populist measures that will make it hard for India to meet its target of bringing the fiscal deficit down to 4.8 per cent of gross domestic product this fiscal year.

On Monday, the upper house of parliament approved a scheme, that will cost an estimated $20 billion, to provide subsidised grains to the poor.

"The government is trying to rationalise subsidies on one front, but has also approved the food security bill simultaneously, raising concerns over whether the government is really committed to meeting its fiscal deficit target," Nitsure said.

(Rueters)