Diwali dip

The proximate cause for the rupee falling to 54.60 against the dollar on Monday — a drop of almost 1.5 per cent since Friday's close — was the global anxiety ahead of the US elections and concerns over whether the Greek legislature will support a key reform measure on Wednesday. Disconcertingly for India, the drop has wiped off most of the gains made by the rupee following the announcement of a set of reforms by the Centre in mid-September. Significantly, the drop has occurred despite the strong signalling by the ruling party at a rally on Sunday, where it unequivocally backed reforms, including the most controversial of them all, foreign direct investment in multi-brand retail.

Movements in a currency usually reflect expectations of future movements, both in the short and long term. The precipitous dip in India's currency that has begun since the backtracking on the rise in the prices of non-subsidised LPG cylinders last week may show how the markets are reading the chances of further reforms for now. For instance, the non-deliverable forward market expects the currency to dip even further to 55.53 in the next three months. That will be worse than the level from where the rupee began firming up from September 13 onwards, after the government unveiled a flurry of reforms. The large drop in the value of the rupee means every barrel of imported oil would be costlier, despite lower prices in the global commodities markets.

It is in this context that the finance minister, P. Chidambaram, said on Monday that he would now need to borrow another Rs 20,000 crore from the markets over and above his borrowing target for this fiscal. The markets were, however, expecting this slippage. The bond yields for the 10-year government paper barely moved on Monday. The finance minister's adverse estimate factors in the expected low realisation from the upcoming auction of airwaves that will at best yield about Rs 13,000 crore instead of the projected Rs 40,000 crore, and the lack of time to disinvest public sector companies to raise another Rs 30,000 crore. The ministry is reportedly set to project the GDP growth rate for the year at 5.5 per cent, the lowest of all such estimates. The markets, too, now appear to agree with the lower confidence levels, despite a rousing Sunday.

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