Rupee breaches 68/dollar again

The rupee slid a little closer on Tuesday to a record low struck
against the dollar last week, as share markets weakened and investors
remained doubtful whether the government would act decisively to
restore confidence in the economy.
With crude oil prices rising dueto fears about a potential US military
strike on Syria, economists have called for an increase in subsidised
fuel prices to help address concerns over a record high current
account deficit and a fiscal deficit that is among the highest of all
the major emerging market economies.
Markets are keenly waiting to see how former International Monetary
Fund economist Raghuram Rajan will handle thedefence of the rupee once
he takes over as governor of theReserve Bank of India on Thursday,
having previously beeen an advisor to the finance ministry.
As elsewhere, traders were also cautiously waiting for US jobs data
due out on Friday that could effect expectations about when the
Federal Reserve will start tapering its monetary stimulus. The
prospect of less easy money from the United States has caused a exodus
from many emerging markets over the past few months, but India
hasfared worse than most because of its precarious deficits.
The RBI's rupee defence has so far rested largely on draining money
markets, but the rupee has still lost over 19.5% against the dollar
since the slide began in early May, and higher short term interest
rates have raised borrowing costs for struggling corporates at time
when the economy's slowdown has become more acute.
The partially convertible rupeebreached 68 per dollar in afternoon
trade on Tuesday, weakening from its close of 66.00/01 on Monday, and
not far from the record low of 68.85 hit on August 28.
The rupee was impacted by gains in the dollar on international markets
and falling domestic shares.
The broader Nifty fell more than 2% on Tuesday on profit-taking,
snapping a three-session winning streak to Monday when it ended at a
2-1/2 week high.
Technicals suggest the rupee could fall further after a periodof
relative range-bound trading since striking the record low last week.
Offshore traders see the rupee staying near the record low with
one-month contracts for non-deliverable forwards trading at 68.30.
India is suffering from a dearthof investment, and the measures taken
by the government so far have failedto convince investors to put more
money into an economy, which is growing at a dangerously slow pace
given India's demographics.
Subsidies
With a national election due byMay, there are doubts whetherPrime
Minister Manmohan Singh's minority government would be ready to take
unpopular steps like raising subsidised fuel prices. Earlier this
week, lawmakers derided a proposal from Oil Minister Veerappa Moily to
close petrol pumps at nights.
India has unveiled measures to curb gold imports and announced gradual
diesel pricehikes, but economists say more are needed.
"Small hikes in fuel are not going to make up for the losses of oil
companies. The government will have to raise prices to send a clear
signal toinvestors, because if they do not meet the fiscal deficit
target, it will be negative for the economy," said Rupa Rege Nitsure,
chief economist at Bank of Baroda.
Data released on Friday showed the economy had grown by a worse than
expected 4.4% in the April-June quarter, adding to fears that growth
this fiscal year willcome in below the decade low growth of 5.0%
notched in the fiscal year that ended in March.
Investors worry the government is more focused on expensive, populist
measures that will make it hardfor India to meet its target of
bringing the fiscal deficit down to 4.8% of gross domestic product
this fiscal year.
On Monday, the upper house of parliament approved a scheme, that will
cost an estimated $20 billion, to provide subsidised grains to the
poor.
"The government is trying to rationalise subsidies on one front, but
has also approved the food security bill simultaneously, raising
concerns over whether the government is really committedto meeting its
fiscal deficit target," Nitsure said.