Tuesday, November 15, 2011

Rupee's Recent Correction

Indian Rupee continues to weaken to post-08 lows.

USD/INR (source Bloomberg)

There seem to be a number of explanations beyond the Europe-driven macro stress. India's current account deficit of some $150 billion/year, convertibility issues, and RBI's lack of appetite to raise rates above the already high levels seem to be some of the reasons. There is also some speculation that this devaluation is meant to stimulate growth by giving a boost to the exporters. Indian papers provide generic explanations:
Sustained dollar demand from banks and importers in view of the higher dollar in the New York market mainly affected the rupee value against the American currency, a dealer said.
Really? The danger here is that this devaluation will exacerbate India's already high inflation, particularly given the recent run-up in fuel prices. India is an economic powerhouse, and a significant slowdown there will have global implications.
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