A weaker currency could undermine recent fiscal and economic measures by the government that helped spark a surge in foreign inflows. It also complicates the central bank's campaign to cut interest rates in a country still facing the prospect of losing its investment-grade ratings. "A weak rupee can revive a number of past woes, upset the easing inflation trajectory, raise CAD financing concerns and up the currency risks for offshore borrowers. This might also raise another hurdle for the central bank for cutting rates," said Radhika Rao, an economist with DBS Bank in Singapore. The Reserve Bank of India is next due to review monetary policy on June 17, and many economists and traders expect it to pause in its monetary easing after cutting rates by 25 basis points in each of its past three meetings.
The rupee fell to a record low of 58.17 on Monday, according to the latest available Thomson Reuters data, as the dollar gained on data showing China's economy losing momentum and after a reasonably healthy pace of U.S. job creation renewed expectations the Federal Reserve might curb its asset purchases later this year. The Indian currency is running neck to neck with the Korean won as the worst performer among emerging Asian currencies in the year to date. The tumble comes as the Indian economy appears to have better momentum than it did exactly a year ago when the rupee last hit a record low, but still faces a long road to recovery. The most immediate risk centres around financing the current account deficit. That measure had been expected to have narrowed this year from a record 6.7 percent of gross domestic product in the October-December quarter due to falling prices for gold and oil - the country's two biggest imports. Worries over the current account have been exacerbated by foreign investor net sales of more than $2.5 billion in domestic debt over the previous 12 sessions, spurred by concerns that the weaker rupee would erode returns.
Overseas investors have also been spooked by the prospect of an end to the Fed's quantitative easing, while for bond investors, the surge in U.S. Treasury 10-year yields since early May has reduced the yield differential with Indian debt. Finance ministry officials told Reuters the falling rupee was discussed in a previously scheduled meeting on Monday with market regulators and the central bank. "The FII (foreign institutional investors) capital outflows are likely to continue for next 10-15 days," an official said adding the rupee could touch even 59 against the dollar if the outflows continued. Overseas funds are vital to India's economy as a surge in net foreign buying since 2012 - totalling almost $50 billion in both debt and stocks - has been key in financing the deficit. "The current account deficit is large, which needs large amount of capital inflows. The dependence on short-term debt is resulting in the hammering of the rupee," said Sujan Hajra, chief economist at Anand Rathi Securities.
source:- sify finance
