After rising 8.3% against the U.S. dollar in the first two months of this year, the rupee has fallen 4% in March and is now worth 51 rupees to a dollar. Intermittent support from the Reserve Bank of India has been largely ineffective.
The triggers for the current bout of rupee weakness are stubborn inflation and risks to growth and corporate profitability flagged by the RBI earlier this month, specifically domestic supply pressures and rising global oil prices. Investors are jittery. Capital inflows in March so far are about $1.4 billion, down from $7.2 billion in February.
New Delhi's budget didn't help. The government failed to deliver on reforms or give any reason to believe it can rein in spending. The Indian currency's problems could get worse.
Data due Friday could show a large balance of payments deficit of nearly $10 billion, Nomura says. It will be the first deficit since 2008. Higher energy prices--India is a net importer of crude oil--will push the deficit wider in 2012.
Further signs of recovery in the global economy could support the rupee if foreign investors are willing to put more funds into India.
But in the meantime, the central bank is not well-positioned to help out. Last year, when the rupee fell as much as 18% against the dollar, the RBI sold dollars in the market to support it. Standard Chartered says the central bank's foreign exchange reserve adequacy is at a decade low, after subtracting a buffer for five months of India's total imports and short-term external debt. In December, the dollar/rupee rate hit a record 54.31 before the central bank intervened. But the RBI may have less firepower than it had even last year--in the short term, a new record low for the rupee against the dollar can not be ruled out.
