Rupee weakness to persist: CII survey

The large current account deficit and our growing vulnerability on the external front have largely contributed towards the secular decline and the current volatility of the rupee

Even as the government has taken a slew of measures to attract dollar inflows, a majority of respondents in a survey by the Confederation of Indian Industry (CII) do not expect much appreciation of the rupee against the greenback in the current quarter.

They wanted more reform measures, including hastening of stuck projects, easing curbs on foreign institutional investors (FIIs) and external commercial borrowing (ECB). Fearing a rise in imported inflation due to rupee depreciation, most respondents say this would not allow the Reserve Bank of India (RBI) to cut policy rates in its next monetary review.

Around 56 per cent of the respondents in the survey, conducted among the chamber’s economic policy members, expected the rupee to trade above 59 to a dollar by end-September.

It closed on Friday at 60.24. Another 15 per cent expect Rs 58-59 to a dollar, as weak sentiment would continue to drive down the rupee. Around 22 per cent displayed cautious optimism, saying the rupee would rise marginally to 57-58. Only seven per cent expect it to bounce back to Rs 56-57 by September-end.

None expected the rupee to move beyond the 56-57 range in the current quarter. CII director-general Chandrajit Banerjee said, “The large current account deficit and our growing vulnerability on the external front have largely contributed towards the secular decline and the current volatility of the rupee.” It has depreciated 9.8 per cent to 60.24 against a dollar since the start of 2013.

The majority of respondents have cited the high current account deficit and burgeoning gold imports as the top reason for the rupee’s recent slide, followed by expectations of tapering of its quantitative easing programme by the US Federal Reserve. Other reasons cited were weak domestic sentiment and rising demand for dollars by importers but the significance was considered much less.

The survey was unanimous about the adverse impact of the rupee’s decline on the economy. A majority felt a weak rupee would contribute towards imported inflation, due to a rise the oil import bill. This might discourage the central bank from cutting policy rates in the next monetary policy review.

Another significant impact they expected was a rise in under- recoveries of oil marketing companies, which in turn would raise the subsidy bill of the government and, consequently, push up the fiscal deficit. The impact of the rupee depreciation would also be felt on import-oriented sectors and on external borrowing but these were rated as less important consequences.

Opinion was divided about RBI intervention to stem the slide. While the majority (53 per cent) felt RBI should not intervene in the foreign exchange market to arrest the fall, the others supported such intervention. All the respondents, however, agreed the recent measures taken by the government were not sufficient to stem the fall.

They emphasized the need to continue with the reform agenda. Among the measures to be undertaken, the respondents recommended fast- tracking of 50 mega projects exceeding Rs 1,000 crore and 200 large projects between Rs 250 and Rs 1,000 crore in the next six months; further easing restrictions on FIIs and on ECB flows, removing short-term capital gains tax on FIIs; addressing constraints in mining and land acquisition, and clearing policy hurdles in the way of foreign direct investment.