India’s troubled currency sees no light at the end of the tunnel as the currency continues to hit new bottoms. The INR was trading at record lows yesterday and closed at 55.03 (down 1.1%) against the greenback. Thus, the central bank has increased restrictions on Forex Dealers holding positions greater than $100 million.
India has been witnessing difficulties as the BRIC nations economy is gradually shrinking, this has been having a direct impact on the rupee. It rapidly declined in December 2011 to 52.75.
The key factor that is putting pressure on the currency is the stress in India’s balance of payments (BoP), both on current account as well as capital account. India’s current account deficit (CAD) has been on a widening trend over the last 4-5 quarters, breaching 4 per cent of GDP in December 2011, which is clearly a zone of high vulnerability.
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India’ central bank the RBI has taken several steps in order to check the sharp volatility in the INR, such as direct intervention in the FX market by selling USD, liberalizing the interest rate regime on the foreign currency deposits, putting limits on intra-day limits on positions taken by forex dealers.
The daily limit on positions has ben extended to a maximum of $100 million, a move to try to stabilise the currency.
Indian exporters are suffering due to the declining rupee however the downhill move of over 20 per cent since summer 2011 has meant the rupee is competitive on real effective exchange rate basis.