The Reserve Bank of India's recent efforts to prop up the rupee are likely to fail, resulting in further depreciation of the currency this year as the euro-zone crisis deepens and risk aversion increases, Capital Economics Senior Global Economist Andrew Kenningham said in a note Monday.
However, a weaker and more competitive currency may be beneficial for India because it will give a much needed boost to demand for exports. Also, since India has limited external debt the negative effects on companies' and the government finances will be fairly modest, the economist said.
Capital Economics observed that since the recent regulatory measures are unlikely to influence the exchange rate the rupee will continue to be driven primarily by global capital flows and risk aversion.
The central bank, in its latest efforts to influence the rupee's direction, spent $20 billion since last September to support the currency. At the same time, the authorities brought in regulatory changes such as tightening of controls on short-selling the currency, and easing of restrictions on foreign portfolio inflows.
The Indian rupee ended last week close to its record low against the dollar hurt by deterioration in sentiment amid disappointing economic news, especially the sharp increase in current account deficit. The government's stance of not raising fuel prices, and its proposed retrospective tax measures have added to the depreciation of the currency.
The short term movements in the rupee continue to be influenced more by global factors than by domestic factors. The rupee has continued to track the equity market closely, which in turn follows equity prices in other emerging markets, besides being closely correlated with other emerging market currencies such as that of Brazil, the firm noted.
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