Is the rupee looking more vulnerable to a downslide?

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Is the rupee looking more vulnerable to a downslide?
On Friday the the rupee hit a two-and-half month low sliding to Rs 55.51 against the dollar, tumbling for the fourth successive trading day.

The rupee has gradually been weakening as the euphoria over the reforms unleashed in September by the government has waned. The parliament session, which began on Thursday has exerted even more downward pressure on the rupee as the logjam is expected to make the rupee more vulnerable to a downslide.

"The rupee is likely to witness high volatility in the coming months with Parliament session beginning with a "whimper" amid a looming political logjam, which in turn makes the outlook for the reform process seem cloudy," an HSBC report said.
The real worry is that the key FDI policies, particularly the ones that need parliament approvals like FDI in the pension sector and increasing FDI limits in the insurance sector are expected to attract foreign investment and boost the rupee. However, if there is a logjam and if the related bills are not passed, one can expect a further slide in the rupee.

The trade deficit (imports-exports) is also widening, which is expected to put pressure on the current account deficit and hence the rupee.

The trade deficit reached to an all-time high of $21 billion in October from $18.1 billion in September due to weak exports and rising imports.

Foreign portfolio investments, which help support the rupee has also started drying up. In fact, net foreign flows are down to a trickle, as foreign funds remain worried over a slowing economy, rising deficits and a volatile currency.

Also, crude oil has been rising steadily and India's crude basket which was trading at an average of $106.69 per barrel for the fortnight from Nov1-15, has since moved up to $ 109.17 per barrel. This is likely to increase the cost of oil imports and exert more pressure on the rupee.

Clearly, the rupee is looking more vulnerable for a down slide than ever before. If the deadlock in parliament is unresolved, and if key bills are not passed, expect no support for the rupee.

Read more about: currency
Story first published: Saturday, November 24, 2012, 10:06 [IST]
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