The Rupee appreciated in December 2008 but on a yearly basis domestic currency has faced quite a severe pull back against the Dollar. Since January 2008, Rupee appreciated by 2.69 percent against the greenback. In December, although global financial crisis continued to hit the world’s biggest economies but still the domestic markets got some sigh of relief from the falling Inflation. India's inflation rate fell to a nine-month low. Inflation as measured by the Wholesale Price Index slowed to 6.61% in the week ended 13th Dec 2008. Inflation has fallen sharply since it crossed 12 per cent for the first time in 13 years in August.
The Dollar faced pressure from Rupee as well as from other major currencies. Negative sentiments on account of slow economic growth made the dollar a scapegoat. Manufacturing activities in the US took a hit and jobless claims sustained their appreciating stance thereby dawdling dollar growth. The Federal reserve of US slashed the interest rates to a range of 0-0.25% during the month in order to provide some stimulus to the deflating economy.
The latest Mid-Year Review policy highlightened the strengths of the economy. This provided impetus to the Rupee. The review was presented in the parliament on 17th Dec 2008. It stated that compared to other global economies India had several strengths to mitigate the adverse effects of global financial crisis compared to other global economies. The review also affirmed that contribution of services in the total GDP in India is still high compared to other economies. India’s domestic savings rate has also remained strong and risen sharply with higher growth during the last five years.
The Dollar got assistance from the lower Oil prices. But against the Rupee it still remained sideline on positive domestic cues. Oil futures on NYMEX touched a low of $ 35.13 per barrel on 24th Dec 2008. The Organization of the Petroleum Exporting Countries (OPEC) decided to cut supplies of Crude in order to support the prices, however Crude continued to sloth downwards. The OPEC on 17th Dec 2008 made a record output cut of 2.2 million barrels from its output.
The OPEC, aiming to exercise greater control over global oil production and pricing, asked Russia to become a member. “We always wanted Russia to join OPEC”, Chakib Khalil, President OPEC, said in a statement, adding that the move would increase the authority and influence of the group, which currently accounts for about 40% of global supply. Russia is the world's major non-OPEC oil producer, sometimes producing more oil than OPEC member Saudi Arabia, which has a quota within the group of 8.5 million barrel per day.
Rupee vs Dollar:
The rupee closed at 48.50 against the dollar, marking a rise of 2.69 %. The domestic currency was at 50.09 against the greenback on 1st Dec 2008. On a yearly basis, the Rupee has depreciated by 23 percent as compared with December 2007.
The Index of Industrial Production (IIP) numbers for the month of October 2008 continued to disappoint the economists. The data pointed on the urgent need of liquidity for the key sectors. The IIP data released for October 2008 showed a marginal decrease on a yearly basis. The IIP for the mining, manufacturing and electricity sectors stood at 174.4, 276.9, and 231.2 respectively, in October 2008, with the corresponding growth rates of 2.8%, (-1.2)% and 4.4% from October 2007. The IIP for the mining, manufacturing and electricity sectors stood at 162.8, 294.4, and 219.3, respectively, in September 2008. The cumulative growth stood at 3.7%, 4.2% and 2.8% in the three sectors in April-October 2008-09 over corresponding period previous year.
Trade deficit continued to pile on monthly and cumulative basis. This was a grey spot in Rupee appreciation against the Dollar. The ministry of Commerce foreign trade data showed that cumulative trade deficit was estimated at $ 72993 million in April- October 2008 as against $ 45636 million in the corresponding period in 2007. Exports were valued 12.1% lower at $ 12822 million in October 2008 than the October 2007. Imports were valued up 10.6% at $ 23360 million over October 2007. Oil imports were $ 7960 million during October 2008 up 22% from corresponding period previous year. Cumulative Oil imports were 60% higher at $ 65774 million in April-October 2008 than oil imports valued at $ 41115 million in the corresponding period a year ago.
Rupee Vs other major currencies
October month turned out to be mixed for the rupee against other major currencies. The rupee ended at 67.95 against the Euro in this period with a depreciation of 5.55 percent. The domestic currency touched a high of 63.08 and a low of 69.17 against the dollar. The pound however lost 8.83 percent against the domestic currency.
The rupee started the month at 76.68 against the Great Britain pound on 2008 and ended at 70.02 on 30th Dec 2008. The rupee touched a high of 70.02 and a low of 76.68. It, however, lost momentum heavily against the yen. The rupee started at 52.58 against the yen and ended at 53.67 a fall of 2.68 percent on 30th Dec 2008 against the Japanese currency.
Year-End Review-2008
In the year end review by Department of Industrial Policy and Promotion, FDI equity inflows have registered a phenomenal upswing. This is a good sign for the bourses and the Rupee in days to come. The FDI equity inflows in the month of September, 2008 were $ 2.56 billion, representing a growth of 259% over the same month in the previous year (during September, 2007, the FDI equity inflows were $ 713 million). FDI equity inflows during April-September 2008 were $ 17.21 billion. Fiscal 2008-09 started with high prospects of growth in the country and expectations of GDP sustaining 9% growth. But the situation deteriorated drastically after mid-September 2008 following the collapse of Lehman Brothers, AIG and also mortgage lenders Fannie Mac and Freddie Mae. The slowdown become worse as US, Europe and Japan moved into recession.
Conditions of developing nations including India deteriorated sharply. GDP growth in the first half of the fiscal year has been 7.8 percent. The headline WPI inflation dipped to a nine month low of 6.61 percent for the week ending 26th Dec 2008. Inflation has eased from the peak of 12.91 percent in August 2008.
The Rupee benefited from the support provided by the government as it announced the stimulus package to gyrate the slowing economy. In order to minimize the impact of the global economic slowdown on the Indian economy, the Government on 7th Dec 2008 unveiled a fiscal stimulus package that is expected to help boost output across sectors and fuel the growth. Government will sought authorization for additional expenditure of Rs 20000 crore for the current year. The major step taken by government was the reduction of CENVAT by 4% for the remaining year. The government is also working for the second stimulus package for the current fiscal and one for 2009-10 which is expected to be announced soon.
RBI took series of steps to ease the liquidity situation by reducing CRR by 350 basis points with the effective rate at 5.50 per cent. RBI also decided to reduce the repo rate by 100 basis points from 7.5 percent to 6.5 percent and the reverse repo rate by 100 basis points from 6 per cent to 5 percent with effect from 8th Dec 2008. All other terms and conditions of the current LAF Scheme remain unchanged.
Outlook:
The US Dollar hit a three month low against the EURO and a thirteen year slump against the Yen after the Fed cut its overnight rates to almost 0% in its monetary policy meeting. The dollar was supported in the previous months due to shortage of dollar liquidity and lack of investment in the risky assets across the globe. However during December the conditions were more stable due to the severe interest rates cuts by governments across the globe.
The declining trend in the WPI monthly inflation rate since September 2008 will help Rupee to hold onto its gains against Dollar. The expectations are that the RBI will cut the rates further as the Inflation has slumped to a nine month low.
