New Delhi, Jun 23 (IANS): The Indian rupee, which has depreciated by almost nine percent since the beginning of this year, is likely to remain volatile and might weaken further if structural issues related to foreign investments and current account deficit are not addressed, say experts.
The partially convertible rupee retreated nearly three percent and touched a record low of 59.98 against a dollar last week.
Kuntal Sur, director for financial risk management at KPMG, said the rupee would remain volatile in short and medium term as the Indian economy was passing through a bad phase.
"We should not just blame the external factors, especially the Fed (US Federal Reserve) for what is happening to the rupee. This is a structural issue," Sur told IANS.
He said the US Federal Reserve chairman's comment worked as a trigger to the slide.
"External issues will be there. Today we have Fed. Tomorrow there might be some bad news from the Eurozone, and the rupee might slide further," said Sur, adding the rupee was more prone to external volatility because of the weak domestic economic situation.
The rupee fell sharply last week after the Federal Reserve, US central bank,
signalled that it would start winding down its stimulus spending later this year.
Federal Reserve chairman Ben Bernanke said June 19 that the Fed may trim this year $85 billion a month of debt purchases, also known as quantitative easing, and might end it in 2014 if the US economy performs in line with its estimates and the job situation improves.
The Fed comments have led to a broad rally in the dollar. Indian currency is among the worst hit.
Senior economist and advisor to Kassa Group Siddharth Shankar said in the short-term the rupee is likely to stabilise in the range of 58-59 against a dollar, but the medium and long-term outlook remained negative.
"I expect 6-7 percent depreciation in the value of the rupee every year. This year the fall is already more than that; so I expect the rupee to remain at around current range," he said.
Shankar said rupee depreciation will fuel inflation and further worsen the current account deficit situation.
India's current account deficit, the difference between the country's total imports of goods, services and transfer and their exports, touched a record high of 6.7 percent in the quarter ended Dec 31, 2012.
It widened in the recent quarters largely due to higher import bills of oil and gold. Due to depreciation of the rupee, India will have to pay higher for the import of these products. The country is dependent on imports to meet almost 80 percent of its oil needs. So there is hardly any scope to cut imports.
On the other hand exports remained sluggish despite the decline in the value of the rupee. India's trade deficit widened to a seven month high of $20.14 billion in May, according to the latest official data.
Federation of Indian Export Organisation (FIEO) president M Rafeeque Ahmed said rupee depreciation has not helped in reviving Indian exports as global demands remained weak.
"Rupee depreciation has not pushed exports as demand is low, other currencies are also depreciating, import intensity of exports are on increase and high inflation is pushing input costs," Ahmed said.
Abhishek Goenka, founder and chief executive of India Forex Advisors, said the dollar would appreciate further on the Fed move.
"We continue to maintain our bearish outlook on rupee with a short-term correction in between and expect the dollar to start its fresh bull run," Goenka said.