The Rupee's Continued Decline

Includes: ICN, INR
by: Mary Daniel

The devaluation of the rupee has been all over the international news this past week. It is of great concern to the global economy. The decline in the Rupee is a major source of distress for India. The only BRIC country in 2010 to see a decline in foreign direct investment, India is facing desperate times. The rupee is the worst performing currency in Asia, having fallen more than 17% this year against the dollar. The decline is creating financial stress for Indian companies that have traded in dollars. The rupee is increasingly vulnerable.

A continued slide could amount to India’s worst financial crisis in decades. Growth is slowing and inflation remains high as political spectators remain stagnant. Six of the world’s big central banks worked together this past week to try to ease the dollar funding strains. The rupee in turn broke a four week losing streak. This is devastating to an already poverty-stricken nation. The majority of analysts expect the rupee to continue its decline. Certainly not hard to predict in the current economic climate.

The Indian rupee could be the first casualty of the eurozone crisis. As Europe’s banks deleverage, investment money has left the Indian markets. If Europe’s situation worsens, that will continue to cause a decline in foreign direct investment in India. India could also be hit with a severe balance of payments crisis. The Indian economy is one of the most vulnerable in the region. This is largely due to the fact that India relies heavily on foreign direct investment as a means of covering its account gap. Foreign direct investment is not consistent, especially considering the current eurozone crisis. The steady decline is affecting several foreign economies as well. Asian currencies are climbing even as the rupee declines. Also, foreign mutual funds that invest in Indian shares are trailing onshore rivals by the widest margin in 13 years. All attributed to the rupee.

Traders are already betting on the rupee’s decline 3 months to one year out. The WisdomTree Dreyfus Indian Rupee ETF (NYSEARCA:ICN) has been experiencing a steady decline, with each day bringing about a new low. Just this past week three days in a row the rupee slipped to its lowest historical level. Yet it did recover to break its losing streak. The rupee has also been impacted by growing worries over the eurozone crisis which has strengthened the U.S. dollar in overseas markets. India is also experiencing widening fiscal deficit and current account deficit domestically. The U.S. dollar has gained more than 20% against the rupee since March. Oil refiners such as Indian Oil Corp. will see firsthand the severity resulting from the weakening rupee. Indian oil refiners depend on imports for the bulk of their crude oil requirements. The weakening rupee would make exports more competitive and give local producers an edge over more expensive imports. But the higher revenues would not be enough to offset the increased costs.

India has a long standing reputation for corruption in its upper ranks. The fundamental financial standings of the nation’s economy are questionable and their current leader is hesitant to make any moves whatsoever. The country is seen as a hub for cheap labor and is the source of many comedies and U.S. frustrations on outsourcing. Now, in addition to the gross decline of the rupee, Indian banks are drawing concern over risky loans. Shorting the rupee could be the most logical play in foreign currency markets at the current moment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.