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A Falling Rupee Increases Pressure on India.


Date: 26-11-2011
Subject: A Falling Rupee Increases Pressure on India
MUMBAI, INDIA - For several months, India has suffered the double misfortune of a slowing economy and high inflation. Now, it has another problem: a rapidly depreciating currency.

The value of the rupee has fallen nearly 14 percent, to 52.21 against the dollar, since the end of August as investors have stepped back from the Indian economy and many traders have stepped up bets against the currency. Less than three months ago, the rupee was trading at 45.79 to the dollar.

India's economy has a big need for foreign capital because it imports more than it exports, but foreign investment has been falling sharply since June, when the country took in $6.5 billion. In September, it took in just $616 million.

During that time, many analysts and investors grew more concerned about the growth prospects of the Indian economy. Some analysts now predict that the country might grow 7.2 percent in the current fiscal year, down from 8.5 percent last year.

Partly in response to the concerns about growth, Prime Minister Manmohan Singh's Cabinet voted Thursday to allow foreign retailers to invest in stores in the country in spite of significant political opposition. Analysts said the long-delayed proposal should help lure more foreign investment into the country, though not right away, especially given the stringent conditions that policymakers imposed on foreign investors.

While many currencies have recently depreciated against the dollar, the rupee has fallen more than most. It is the worst-performing Asian currency this year, and some analysts are predicting that it will fall further. Strategists at HSBC said in a note issued Thursday that the rupee could fall to 58 against the dollar.

"We do not yet see light at the end of the tunnel," Paul Mackel, the head of Asian currency research at HSBC, wrote.

Analysts say the depreciation of the rupee could exacerbate inflation, which has been at or above 10 percent for more than a year, by sharply increasing the cost of oil and other commodities that India imports and has to pay for in dollars. That would also worsen the government's large fiscal deficit, because the country heavily subsidizes imported fuel and fertilizers.

For Indian exporters, including software outsourcing companies like TCS and Infosys, a weaker rupee could help increase sales because it would make their products and services cheaper. But analysts say those gains would be muted because Western customers are not spending much.

Analysts say investors have bet heavily against the rupee in recent weeks after officials at the central bank, the Reserve Bank of India, suggested that it would not intervene to limit the currency's slide.

The central bank, however, has since stepped in to try to halt the sharp depreciation by selling dollars and buying rupees. The bank also said it would sell dollars to state-owned oil companies so they would not have to buy them on the open market, which would further drive down the value of the rupee.

In the longer term, the government's decision to allow foreign retailers in the country should help, if companies like Wal-Mart, Tesco and Ikea inject money into the Indian economy to set up new stores and warehouses.

But the flow will be measured and drawn out, analysts said. India's commerce minister, Anand Sharma, said on Friday that foreign retailers that sell multiple brands of clothing could set up stores only in cities with more than 1 million people; there are 53 such cities in the country.

Also, each of India's 28 states would have to individually allow foreign-owned retail stores in their territory.

Source : startribune.com

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