Undermined by weak fundamentals and the prospect of an early end to US policy accommodation, the rupee sank below rs68.0/US$, from rs54.0/US$ at the start of May. A downturn in currency values versus the US dollar has been almost universal across the emerging world, amid a de-leveraging of risk positions. Yet India has suffered more than most due to its large current account deficit, which rose to 4.8% of GDP in the year to March. In addition, inflation, measured by WPI, reaccelerated to 5.8% (y-o-y) in July, while doubts about the potential of the economy have been raised by regulatory issues, corruption and the poor state of infrastructure. Growth slid to only 4.4% (y-o-y) in Q2 as investment dropped and reform optimism unravelled ahead of new elections due by May 2014. Some critics warn that drastic measures are needed to avoid a crunch similar to that of 1991, when India was forced to sell its gold as part of an IMF bailout. A repeat of that scenario should be avoidable, but the government has been forced to impose import levies on the precious metal and other luxury items. The August appointment of a respected former IMF economist to the helm of the Reserve Bank may reassure rattled investors. However, ongoing FX volatility would cast doubt over its resolve to stem the decline in the rupee, which contributed to an improvement in the trade balance in July. The consensus has downgraded its growth estimate for FY2013 and the difficult economic situation suggests that the currency could experience further near-term instability.
You can download a sample of Foreign Exchange Consensus Forecasts at www.consensuseconomics.com.