Why the rupee may fall to 70 against dollar

The Indian rupee recovered sharply on Tuesday after key regulators took steps to curb speculative trading in the currency, but some gains were knocked off in minutes and the currency was back below the psychological barrier of 60.

Independent expert Moses Harding said this is not a bullish reversal, but a firefighting activity so that you don't allow the rupee to post a new historic low every day.

Other experts told RTTN that the recovery might be short lived as these measures will do little to correct the fundamental reasons that are driving the rupee lower.

A V Rajwade, consultant in currency and interest rate risk management said the rupee fall is far more a function of what is happening in the domestic economy rather than what happens to the dollar in the global markets.

Mr Rajwade was referring to comments that attributed the slide in the rupee on account of a rally in the U.S. dollar, which climbed to a three-year high on Monday.

"That becomes a very glib kind of explanation, which in a way many policymakers prefer because that avoids introspection as to where have we gone wrong...," he said.

Mr Rajwade blamed government's macro-economic policy, particularly the exchange rate policy followed over the last 4-5 years, behind the current crisis.

"The problems are fundamental and our policy makers do not seem to realise the basic problem which is the huge deficit on current account and over dependence on capital inflows. Nobody can live forever on somebody else's money," he said.

The biggest problem seems to be India's huge current account deficit, which hit a record high 4.8 per cent of gross domestic product in fiscal year 2013.

This deficit was being financed by foreign money for last many years, but as the U.S. economy gathers momentum, there is increasing likelihood that the Federal Reserve will taper its bond buying programme (also called quantitative easing) as early as September.

The fear of Fed pulling the plug on easy money has triggered a selloff by foreign institutional investors (FIIs), who have pumped almost $14 billion into India so far this year and $22.2 billion last year.

"We cannot expect foreign investors to keep financing us when we keep incurring deficits year after year. Somewhere the music was going to stop... whether it happens because Mr Bernanke said something or because foreign investors are getting extremely disappointed with what's happening with Indian economy, but the basic problem is we continue to live on borrowed money year after year," Mr Rajwade said.

The government's decision to hike duty on gold, the second biggest import item, has helped cut imports by 81 per cent in June from the previous month. However, if FIIs continue to pull out, the government will have to come up with new plans.

Mr Harding says 62-65 may be the new normal for the rupee if no corrective steps are taken.

The Reserve Bank, too, lacks fire power because it has foreign exchange reserves to cover imports for seven months only. The central bank's many interventions so far have miserably failed to stop the rupee from posting record lows nearly every week.

Market analyst Saumil Trivedi says the current cycle of weakness in the rupee started way back in July 2011, but given the current momentum, upside shootouts can be dramatic and disturbing.

Last month, Nomura's forex valuation analyst said the rupee is still about 17.6 per cent overvalued against the dollar, which means the rupee can slide all the way to near 70.

"Somewhere around the mid-60s would not be unrealistic for the Indian rupee especially given the move in bond yields that we have been seeing," Mohammed Apabhai of Citi told RTTN.

The message is loud and clear. Unless more concrete steps are taken to address the fundamental problems plaguing the rupee, the currency will continue its slide on a one-way street.