India’s rupee plummeted to a new low in two decades yesterday as a surge in oil prices threatens to worsen a current account deficit and push the economy toward its biggest crisis since 1991.The fear is that the continued drop in the rupee can lead to further inflation, which is already at a five-month high, in turn depressing consumer demand and raising costs for manufacturers across the board.
The rupee slumped 3.9 percent to 68.8450 per dollar in Mumbai yesterday, the biggest drop since 1993 according reports from local banks. The currency, which lost 13.7 percent this quarter and 20.1 percent this year, is headed for the worst annual loss since a balance of payments crisis in 1991 forced the nation to pawn gold to pay for imports.
According to Finance Minister Palaniappan Chidambaram, India’s budget and current account deficits are responsible for the rupee’s slide, The Indian government is taking broad measures to contain the shortfall to within $70 billion in the year through March 2014, he said, compared with an unprecedented $87.8 billion in the previous 12 months.
Government Intervenes
In addition, India's central bank will provide US dollars directly to state oil companies in its latest attempt to shore up the currency, reflecting the stiff economic challenges facing the country in an uncertain global environment.
The Reserve Bank of India announced late on Wednesday the implementation of a special window "with immediate effect" to sell US dollars through a designated bank to Indian Oil Corp, Hindustan Petroleum Corp, and Bharat Petroleum Corp "until further notice". The RBI last opened such a window during the 2008 global financial crisis, although it had been widely expected to re-implement the measures after last month telling oil companies to buy US dollars from a single bank.
State-run companies are the biggest source of US dollar demand in markets, worth $400 million to $500 million daily, and directing them to a special window is meant to reduce pressure on the rupee.
Rupees traded in markets outside of India recovered somewhat after the measures were announced, with one-month forward contracts dealt at 68.30 from levels of around 70. Officials familiar with RBI thinking are hoping that US dollar sales for the state-run oil companies would be offset by positions in forward markets. The RBI would then need to dip into its currency reserves but would be able to replenish the lost US dollars at a future date by redeeming the forward contracts from oil companies when the rupee stabilizes.
The offsetting positions would essentially make these US dollar loans, designed to reduce concerns about reserves that at $279 billion cover only about seven months of imports.
The action further cements the role the central bank is taking to combat the fall in the rupee, as the government has yet to unveil steps that can convince markets it can stabilize the rupee and attract foreign investment.