Weakness in rupee likely to persist :: Macquarie Research,

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Weakness in rupee likely to persist
Event
􀂃 USD/INR has moved from 44.1 to 47.8 in the past six weeks.
Impact
􀂃 Global uncertainty weighing on rupee: The rise in the US dollar has
triggered a major depreciation in rupee. USD/INR has moved from 44.1 to
47.8 in the past six weeks (since Aug 1), depreciating by 8.5% during this
period. The trade-weighted US$ has appreciated 3.5% since the start of
August 2011. The evolving Euro zone debt concerns have increased
uncertainty in the currency market. In the past two weeks (since 2 Sep), the
rupee depreciated by 4.1% against the US$ but appreciated 0.4% against the
Euro.
􀂃 Indian rupee is the worst-performing currency in the AXJ region since
August 2011: The Indian rupee has depreciated by 8.5% against the US$
since August 2011 compared to the Korean won’s depreciation of 5.1%, the
Malaysian ringgit’s 4.8% drop and the Indonesian rupiah’s 3.7% fall.
Outlook
􀂃 Rupee likely to remain under pressures in the near term as: a) India runs
a high current account deficit of 2.6% of GDP and high trade deficit of 7.6% of
GDP as of FY11: (b) India depends on capital flows to fund its current account
deficit. Any major risk aversion in global equity markets can result in a
slowdown in capital flows: (c) India imports around 80% of its oil requirement.
High oil prices can result in a further widening of the current account deficit.
We expect the rupee to remain weak in the near term if the trade-weighted US
dollar continues to rise. We expect the rupee to remain in the range of 46.5-
47.0 through end-December 2011. While depreciation in the rupee is good for
exporters, in the event of high global commodity prices it would likely result in
policy rates remaining higher for longer.