Central Bank Adviser Says Rupee in Danger of Sliding Past 70

The rupee could sink to a record low past 70 per dollar and the Reserve Bank of India’s struggle to stem the drop has hurt its credibility, one of its advisers said as the currency tops incoming Governor Raghuram Rajan’s agenda.

“There’s a high probability” of the rupee ending 2013 at 65 to 70 and an “external shock could push it above 70,” Arvind Virmani, a member of the Reserve Bank’s advisory panel on monetary policy, said in e-mailed responses to questions. Rajan is due to take over today, according to the central bank.

The rupee has plunged 19 percent this year as the prospect of cooling U.S. monetary stimulus and India’s record current-account deficit prompt investors to pull out funds. The drop risks stoking inflation and Virmani said the RBI has struggled to fight the currency’s slump even after raising interest rates and engineering a cash squeeze.

“It should have let the rupee depreciate to a point between 65 and 70 that it could successfully intervene to demonstrate effectiveness and give a message to speculators,” Virmani said in the e-mailed comments yesterday. The loss of credibility made it more difficult to keep the rupee from overshooting above 65 per dollar, he said.

The currency weakened as much as 1.3 percent before paring losses on suspected central bank intervention and was trading at 67.28 as of 1:24 p.m. in Mumbai. The S&P BSE Sensex index of stocks rose 1.1 percent. The yield on the 7.16 percent government bond due May 2023 slid to 8.46 percent from 8.58 percent yesterday.

Rajan’s Authority

Rajan, who predicted the 2008 global financial crisis and is a former International Monetary Fund chief economist, has been appointed RBI governor for three years.

He is on leave from his post as professor of finance at the University of Chicago Booth School of Business and has been the top adviser in India’s Finance Ministry since 2012.

He brings with him an authority that could usher in changes at the RBI and influence reforms both at financial regulators and in the Finance Ministry, Virmani said.

“Rajan’s immediate challenge is to stabilize the currency and then get back to addressing growth concerns,” said Vivek Rajpal, a Singapore-based strategist at Nomura Holdings Inc. “A lot depends upon how the global picture pans out.”

RBI Clarifications

The RBI today clarified some restrictions on outflows implemented Aug. 14, giving companies more scope to invest abroad if the funds come from overseas borrowings.

The central bank also allowed businesses to borrow from foreign shareholders subject to conditions, and said residents can remit more for expenses including medical treatment and education fees than a $75,000 limit imposed last month.

Asia’s third-largest economy expanded 4.4 percent last quarter from a year earlier, the slowest pace since 2009, as investment fell and consumer spending moderated.

Higher funding costs threaten to weigh on growth after the RBI capped cash injections into the banking system and raised the marginal standing facility and bank rates in July.

Virmani said he expects India’s slowdown to bottom out in the July through September quarter, followed by a “very slow” recovery unless policy reforms steady the economy and business investment accelerates.

Duvvuri Subbarao, the outgoing governor of the Reserve Bank, repeatedly flagged the challenge of price pressures fanned by government spending.

Deficit Challenge

The new governor will have “little influence” on the administration’s approach to the budget deficit, said Virmani, the president of Indian think-tank Chintan.

Virmani and the six other external members of the RBI’s technical advisory committee only provide recommendations and don’t vote on monetary policy.

Finance Minister Palaniappan Chidambaram targets a budget shortfall of 4.8 percent of gross domestic product and a current-account deficit of 3.7 percent of GDP in the year through March 2014.

The deficits have jeopardized India’s investment grade credit-rating. Standard & Poor’s said yesterday there’s a more than one-in-three chance of a downgrade within two years.

The country also faces inflation risks even as economic expansion moderates. Consumer prices climbed more than 9 percent in July from a year earlier, the fastest pace in a basket of 17 Asia-Pacific economies tracked by Bloomberg.

“The main reason for the rupee depreciation is the loss of competitiveness of the Indian economy due to high inflation and low corporate investment,” said Virmani, adding he favors reduced government expenditure and looser monetary policy.

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