India’s battered rupee rebounded on Friday following a range of policy measures introduced to protect Asia’s worst performing currency this year.
The rupee rose as much as 2 per cent against the dollar after the Reserve Bank of India imposed restrictions on forward contracts and reduced the amount of foreign currency dealers could hold overnight, as part of a package of measures designed to reduce speculation on the currency. The rupee later settled back to trade 1.5 per cent higher at 52.81.
India’s central bank reacted after the rupee hit a series of lows against the dollar in recent weeks, touching a new low on Thursday, against a backdrop of concerns about India’s slowing growth rate and the inability of its government to introduce reforms to increase flows of foreign currency.
In spite of Friday’s early moves, analysts remain sceptical that the currency, which has fallen by more than 16 per cent since the start of the year, would continue to recover.
A Prasanna, chief economist at ICICI Securities, said: “This move will take away speculation at the margin, but in the medium term the fundamental problem remains”.
India’s current account deficit is approximately 3 per cent of gross domestic product. Analysis by Citibank suggests that deficit will remain stable in the coming year, but notes that the size of the absolute deficit had increased to about $55bn – raising substantially the quantity of capital India needs to attract.
Mr Prasanna said that the RBI would need to continue intervening to support the currency, while also being forced to examine further ways to increase these flows of foreign currency, including introducing new measures to encourage inflows from Indians living abroad.
In recent weeks the RBI has conducted other minor interventions to protect the currency, including increasing rates on bank deposits for non-resident Indians and relaxing regulations on the foreign borrowing of domestic companies.
Even if the current minor recovery in the rupee is sustained, other analysts said the currency’s fall over recent months would harm corporate India in the next quarter; with companies due to begin reporting their next quarterly results in January.
Dozens of Indian companies are coming under financial stress after the sharp fall in the rupee against the dollar over the past few months made once-cheap loans in the US currency much more expensive, analysts have warned.
Indian companies face an overall short-term foreign debt maturity of $16bn for the year ending in March 2012 – according to Crisil, the Indian subsidiary of the US credit rating agency Standard & Poor’s – the majority of which is US dollar-denominated.
Rashesh Shah, chief executive of Edelweiss, one of India’s largest brokerage firms, said: “The companies who got hit in the last quarter will get hit again. Many companies are still not hedged, and they will pay a price for that.”
