New Delhi: Rupee, the worst performing currency in the emerging markets with a 12 per cent fall in the last two months, has become the biggest headache for the UPA government. While the government is claiming that the rupee will correct itself, analysts believe that the only way to strengthen the currency is to speed up clearance of stuck projects which can restore confidence in foreign institutional investors.
"The government does what it can and as the Finance Minister there is only so much you can do because at the end of the day it depends on the infrastructure of the country," Religare Securities President Jayant Manglik said.
What triggered the sharp fall of rupee?
The fall started after an announcement from the central bank of the US, the Federal Reserve that they will start withdrawing stimulus. This forced foreign investors to pull out investments from countries like India. "Don't expect the pullback to be below 58 half and 59. Those kinds of levels will be lapped up by importers," Agam Gupta of Standard Chartered Bank said.
At the present rate of the Indian currency, there is a fear that the government might not be able to control the sharp rise in inflation. Fuel might also become more expensive and even the RBI might give up on cutting interest rates. On macro side, the sharp depreciation in the currency will lower growth expectations and impact foreign investments. Companies dependent on imported raw material will also see a sharp fall in profits. Travelling and studying overseas too is bound to become dearer. "Things will not get better from here because we continue to be in a weak position," Manglik said.
What does the rupee fall mean for us:
- Higher inflation: The government won't be able to control sharp rise in prices of food and essential commodities.
- Higher fuel price: Import of crude and a depreciating rupee will increase the cost of imports
- Higher EMIs: The RBI may resort to higher rates to control the fall of rupee
- Slower growth: Sharp fall will lower growth expectations
- Slowdown in foreign investment
- Higher exchange rates: Fall in profits of firms dependent on imported raw material
- Costlier foreign travel and overseas education