The Currency Issue - The Rupee struggles to get back on track

As has been well documented, the Indian rupee plunged to a record low against both the pound and US dollar as domestic concerns linger over the troubled economy as well as recent talk of tapering of monetary stimulus by the US continues to hinder the rupee's performance.

India's current account deficit is the third highest in the world, behind the US and the UK, standing at $98 billion, which is 4.9 per cent of the country's total GDP for 2013. Recent speculation of the US Federal Reserve tapering its $85 billion monetary stimulus programme has also put pressure on the rupee, as a reduction in monetary stimulus would make it difficult for India to reduce the record current account deficit.

As a result, Indian finance minister P. Chidambaram has put to Parliament a 10-point plan to revive the struggling economy. The action plan includes promoting exports, encouraging manufacturing and reducing the fiscal deficit. On top of this, the government has increased duty levied on importing gold and silver in a bid to contain the amount of Indian rupees which are flowing out of the country and also announced a slew of measures including easier overseas borrowing norms to fetch an additional $11 billion this year to bring down its deficit

Aside from the domestic concerns, recent political uncertainty has also impacted and hurt the Indian equity market. Countries such as India which are dependent on the import of crude oil from Syria and its other neighboring countries have also been hit over recent threats of Western military intervention in the country.

Tensions over Syria seem to have subsided for now and any aggressive tapering of monetary stimulus by the US Federal Reserve seems to be unlikely. These combined with the 10-point plan has allowed the rupee to regain some ground -in the short term at least.

The Reserve Bank of India along with the government still has a long way to go to reduce this record current account deficit which is hurting the economy and until we see a sustained impact by the measures put in place, the rupee may well continue to come under pressure.