Rupee Falls to All-Time Low as Indian Economy Faces Potential Trouble

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Aug. 22 – This week, the Indian rupee briefly closed at an all-time low of 63.25, making it Asia’s worst performing currency this year after dropping by 16 percent against the U.S. dollar since May. It is now worried that the measures taken by the Indian government and the Reserve Bank of India (RBI) to prevent the rupee’s downward slide may not have been enough.

For the savvy investor, the depreciation of the rupee does not signify the end of opportunity in India however. For new companies entering the Indian market, they will find that the cost of entry is lower than what it has been.

Furthermore, the government is taking a number of steps to reverse the downward trend. Starting August 23, the RBI will begin opening aggressive market purchase operations of long dated government securities. Due to the hardening of long-term yields, which has resulted in mark-to-market losses in Indian banks’ investment portfolios, the current requirements on statutory liquidity ratio securities have also been relaxed.

The coalition government of Prime Minister Manmohan Singh is working to pass meaningful reforms to attract greater long-term capital and to help close a record-high current account gap. Not only does the current account gap exacerbate the devaluing of the rupee, but it also has a negative effect on India’s foreign currency reserves – which would likely result in the country having to borrow more money from overseas.

Commentators have made comparisons of the depreciating rupee and current economic environment to the 1991 Indian financial crisis. During this time, the rupee fell by 32 percent against the U.S. dollar, and foreign exchange reserves were depleted.

Prime Minister Singh has stated, however, that India currently has six to seven months of reserves whereas in 1991 the country only had reserves for 15 days. Thus, in Prime Minister Singh’s words, there is no chance of a recurrence of the 1991 crisis.

Nonetheless the coming months will not be easy for the country, and there unfortunately will not be any quick solutions to the downward slide of the rupee.

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