Why it is difficult to stop rupee's slide

It was a nasty blow for many when the Indian Rupee (INR) fell below the psychologically important benchmark of 60 to the US dollar in July 2013. In hindsight, it is clear that bigger shocks were yet to come.

In a matter of three trading sessions - from August 16 to August 20 - the rupee has plummeted from 61.81 to 64 to the dollar. This means the rupee's total depreciation so far this year alone has been 17 per cent.

The impact is being felt across various parts of the economy.

"The rupee has again jolted the domestic market by crossing the 63/64 barrier, and increased inflation is on the cards," says Dinesh Thakkar, Chairman and Managing Director, Angel Broking.

Indeed, in the last three trading sessions, as the rupee dropped, the BSE Sensex too fell from 19,300 to 18,200 points. Rate sensitive sectors such as banking, realty and capital goods have taken a severe beating. The banking index, for instance, lost more than 10 per cent in the last three sessions with companies such as YES Bank, HDFC Bank, Bank of Baroda and State Bank of India trading at their 52-week lows. The realty and capital goods index fell 7 per cent and 10 per cent, respectively.

Further, the impact on imported inflation is expected to increase dramatically considering India imports about 80 per cent of its oil requirement and about 800 tonnes of gold annually. In this scenario, monetary policy making by the Reserve Bank of India (RBI) at its next meet will become even more challenging.

"The Indian economy is reeling under pressure, not only due to the fears of flight of capital ahead of the US Federal Reserve's expected move of tapering off quantitative easing, but also due to negative domestic economic fundamentals that are driving the Rupee weaker," Thakkar adds.

Although there has been some intra-day recovery of the rupee since the RBI intervened and bought some dollars, analysts feel that some of the other measures taken by the central bank earlier are likely to make an impact only in the long run. In the short-term, the rupee is expected to continue to witness a bearish ride.

Again, the RBI's measures to reign in the rupee are likely to have some collateral damage. The bond markets, for instance, were badly hit with the rupee breaching the 64-mark to the US dollar, with the 10-year government bond yield shooting up to 9.40 per cent, the highest since August 2008. This rise could be attributed to a combination of the fall in the rupee, over-supply of debt and the RBI's liquidity tightening measures.

According to Kishore Narne, Associate Director Head - Commodity and Currency at Motilal Oswal Commodities, the slide is likely to stop at Rs 65 considering the fall has been exaggerated due to sentiments rather than fundamentals alone.

But there are no measures in sight that could reverse this trend right away. For instance, FII flows that could have brought in US dollars have dried up due to the under-performance of the Indian equity markets, while bond yields too have been volatile, leading to overall outflows.