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With Economy Slowing, the Indian Rupee Tumbles

Published on November 26, 2011 by   ·   No Comments

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.

Foreign investment in India, which has a big need for foreign capital because it imports more than it exports, 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 have grown more concerned about the growth prospects of the Indian economy. Some analysts now predict 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, the cabinet of Prime Minister Manmohan Singh voted on 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 policy makers imposed on foreign investors.

The rupee was up just 0.3 percent against the dollar Friday after the decision to open the retail market.

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 could 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 worsen 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 deepen the government’s already 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. Moreover, higher exports would not fully offset the rising cost of imports because India has an annual trade deficit of more than $80 billion.

Ayush Lohia, the chief executive of Lohia Auto Industries, a maker of electric bikes and scooters, said his costs for components like motors, controllers and plastic had shot up 15 percent in recent weeks. He has not yet raised the price of his products, which sell for 25,000 to 31,000 rupees ($480 to $590) in New Delhi, because he is worried about losing sales.

“We are just waiting to see if it will come down from the current level so that there will be no reason to increase prices right now,” he said. “I am just praying to God that the dollar can go down below 50 rupees.”

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

“The Indian rupee’s fall has been too much, too soon, and R.B.I.’s own guidance has added to the depreciation pressure by giving a green light to speculators” to bet against the currency, said Rajeev Malik, an economist at the investment firm CLSA.

The central bank, however, has since stepped in to try to check the sharp depreciation by selling dollars and buying rupees, analysts say. The bank has also said it will sell dollars to state-owned oil companies so that they will 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, warehouses and other facilities.

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

Mr. Sharma also said those retailers would have to invest a minimum of $100 million, put 50 percent of their investment in back-end infrastructure and buy 30 percent of the goods they sold from small companies. Also, each of India’s 28 states would have to individually allow foreign-owned retail stores in their territory.

“The step which we have taken is an investment in the present and the future of this country,” Mr. Sharma said.

Retailers have welcomed the move. Ikea, the Swedish furniture and home furnishings retailer that had previously said it wanted to set up stores here, said in an e-mail that it would “expect to present more information shortly about our intention to establish retail operations.” Because it sells only one brand of products, the company would be able to own 100 percent of its Indian operation under India’s new rules.

Rajan Bharti Mittal, a vice chairman of the Bharti Group, Wal-Mart’s Indian partner, said in an interview that the conditions imposed by the government on retailers that sell more than one brand were acceptable. He said Bharti and Wal-Mart would soon start discussing how best to take advantage of the new rules.

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