The precipitous drop in the Indian Rupee currency – Where is the next support level?

Lately, one might have noticed the volatilities happening in the foreign exchange markets, most notably the Chinese Yuan currency, the Australian Dollar, the US Dollar, etc. However, an emerging economy that might surprise the foreign exchange markets this week is likely to be the Indian Rupee currency (INR). If one could recall, I wrote an article discussing about the Indian economy, and the severe current account deficits that the country is facing. At that time of my writing, the Indian Rupee currency was trading at approximately 59.0 to a US Dollar. But, in recent weeks, following the hint by the US Federal Reserve (US) Fed in late June 2013 that policy makers will begin their tapering process by September, and complete the process by June 2014, various emerging countries, including the BRICS (Brazil, Russia, India, China, South Africa) countries have seen their domestic currencies fluctuate in the foreign exchange market, and the Indian Rupee currency is not spared either from the volatilities. According to Bloomberg Online, the last record low of the Indian Rupee was 61.2125 to the US Dollar as of July 08, 2013.

In a Bloomberg Online article published on July 09, 2013, it was reported that the Reserve Bank of India (RBI) has stepped in by announcing a new set of anti-speculation measures of the domestic currencies. The new regulations include the prohibition of banks from proprietary trading in currency futures and exchange-traded options, etc. The moves by RBI are aimed at stemming the outflows of the domestic currency, which, if left unchecked, could lead to a prolonged slump in the Indian Rupee and the current account deficit could worsen.

However, with the curtailment of derivatives trading in such instruments, regulatory arbitrage is still possible, given the size of the foreign exchange market, which by nature, is an Over-The-Counter (OTC) market, and is touted as the “Wild West of Trading”. If the Indian Government were to curtail speculation on such financial instruments, there are other avenues to look for speculation opportunities, including derivative contracts found in New York and Chicago, or perhaps London, etc. It might not be quite effective if traders start to exploit some of the loopholes. Structural and fundamental reforms ultimately determine the direction of any country’s currency value, including the Indian Rupee, and if such reforms are not being implemented across the board, efforts to stem the outflow of capital from India are nowhere near possible, provided the government is able to print more currency, which will lead to runaway inflation, and I believe that the Indian Government is not in the capacity to lose electoral support as a result of such flawed economic actions.

India has quite significant large pool of local talent, and other potentials, especially in the Information Technology and Industrial fields, but much of the lacking points include factors such as political instability, sectarian violence across many provinces, the lack of gender equality, especially the ill-treatment inflicted on the female population, poor infrastructure, large rich-poor divide, among others. Recent projections for economic growth in India for 2013 are approximately in the sub-par range of 5.0 to 5.7 percent, which is much less than China (expected GDP growth of approximately 7.5 percent for 2013), and Myanmar (expected GDP growth of 5.8 to 6.0 percent for 2013). There are many questions left to be answered by the Indian Government on the state of economic affairs in India.

In a Bloomberg Opinion article by Jim O’Neill, the famous Goldman Sachs economist based in London, who coined the term BRICS, has prescribed his 10-step program for India’s economy. (Interested readers could follow this link to find out more: http://www.bloomberg.com/news/2013-06-23/a-10-step-program-for-india-s-economy.html). In the opinion article, he talks about some of the reforms needed to be implemented by the Indian Government which includes governance, education, adoption of an inflation target, international trade, among others. It was quite a frank assessment of reforms needed to get the country back to life, rather than to take on the path of slowing growth in the economy and always ‘fighting fires’, so to speak when it comes to reforming the country’s economic system.

In conclusion, I believe that it is not all doom and gloom for the Indian economy provided the Indian government is able to show its commitment in implementing tough policies, including the liberalisation of the country’s economy, the dismantling of the state-run enterprises, implementing rural reforms, education, fair treatment of all individuals, including the female population, removal of the caste system, etc. Such reforms might allow the country to get back on its feet, and start to challenge China, and other nations in terms of economic growth, and quality of life.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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