No End in Sight for Sell-off in Indian Rupee

NEW YORK ( TheStreet) -- Earlier in the month I suggested the Indian rupee was positioned for continued weakness. This has turned out to be the case, as the rupee continues to be one of the world's worst performing currencies -- hitting new record lows after declines of more than 17% for the year. The reasons for this have come from two central areas: market uncertainty generated by potential Syrian military conflicts has led to surging oil prices, and India's unmanageable current account deficit has discouraged investors from adding exposure in the country's assets.

The weakness has extended to India's stock and bond markets as well, and the situation is starting to more closely resemble the balance of payments crisis the country experienced in 1991 when India was forced to use gold as a collateral payment for covering import costs. India imports roughly 80% of its oil, and this month's 8.9% increase in Brent crude prices will only add to current account problems that have undermined prospects for the rupee all year.

In the first seven months of 2013, India imported oil at an average rate of $14.2 billion (a slight increase from the $13.9 billion in the previous year.) The government now plans to enact measures to reduce oil imports, but this is easier said than done and broader growth prospects are starting to look bleak. GDP figures for the second quarter are now expected to show an increase of 4.6%, and will likely drop below 4% for the year. If these estimates are accurate, capital flight and external deficits have created a scenario where India is expanding at its weakest pace since the 1991 crisis.

As a result, the rupee has seen some of its worst intraday declines in two decades, and the currency is now set on a clear path to fall below 70 against the U.S. dollar. The USD/INR forex pair has fallen by more than 13% this quarter but there is little to suggest that the declines have reached a bottom. In bond markets, yields for the benchmark 10-year note have surged to less than 9%, after seeing single-session gains of more than 50 basis points. In stocks, the SENSEX continues to trade under pressure, losing 7.4% on the year and falling to its lowest levels since September.

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