Rupee Continues Decline on New Evidence of Weakness in Indian Economy

MUMBAI — The Indian rupee began slipping lower in currency markets again on Monday and Tuesday after a two-day respite, as further signs emerged of broad troubles in the Indian economy.

An HSBC survey of purchasing managers at manufacturers across India, released on Monday, showed them to be their gloomiest since March 2009, at the bottom of the global economic downturn. Businesses across the country are bracing for a sharp increase in the regulated price of diesel fuel, as the rupee’s steep drop in August has driven up the Indian cost of crude oil, priced in dollars and almost entirely imported.

The rupee was down another 0.5 percent against the dollar on Monday and a further 0.6 percent in early trading on Tuesday, to 66.43 rupees to the dollar, bringing its decline since early May to a little more than 20 percent.

Currency traders said that they perceived hints of modest intervention to cushion the decline by the Reserve Bank of India, the country’s central bank, which acts through state-controlled commercial banks when it does intervene so as to camouflage its activity.

The Mumbai stock market showed signs of recovery on Monday, with the benchmark Sensex index rallying 1.43 percent by late afternoon.

Exporters would be expected to benefit from a cheaper rupee. But poor roads, restrictive labor laws and heavy regulation have left India with a manufacturing sector that, although stronger than a decade ago, still struggles to compete with China and other East Asian economies. Indian companies rely heavily on imports for materials and equipment that they cannot buy within India, and the costs of those imports are surging as the rupee falls, limiting gains in Indian competitiveness.

At Challenge Overseas, a manufacturer of trousers on the northern outskirts of Mumbai that exports mainly to the Middle East, the floor and corners of the factory were piled high over the weekend with rolls of gray and black fabric, six feet long and a foot in diameter. But all of the fabric had been imported from China.

“Our owner goes to China every three months,” said Javeri Savia, the general manager of production. “The newer textures and weaves all come from China.”

Like many Indian factories, Challenge also lacks economies of scale. It has just 60 workers to cut, sew and iron its trousers, which sell at wholesale for about 1,000 rupees, or $15, apiece. Similar factories in China often employ several thousand workers. “When you compare with China and all of them, we are peanuts,” Mr. Savia said.

The rupee traded from 52 to 55 to the dollar until early May, when it began a gradual slide that the Indian government tried to arrest through market intervention and other measures, including raising the tax on gold imports.

The rupee continued drifting down through the summer, then began falling faster in mid-August when senior government officials made it clear in speeches that they were reluctant to resort to more drastic measures to arrest the rupee’s decline, like sharp increases in interest rates or an imposition of stringent controls on moving large sums of money in and out of the country.

The rupee briefly fell last Wednesday to almost 69 to the dollar, prompting the Reserve Bank of India to supply dollars from its reserves through a local bank to the country’s state-controlled oil refiners and distributors. That industry tends to be India’s biggest buyer of dollars so as to pay for crude oil imports. The rupee slowly crawled back above 66 to the dollar on Thursday and Friday before drifting down a little on Monday.

Paritosh Mathur, the head of fixed-income and currency trading in India for Deutsche Bank, said that volatility in the rupee’s value appeared to be diminishing. He said he saw little chance that the rupee would return to its levels of last spring in the next two or three months, but also little chance that it would test the lows of last Wednesday.

The HSBC index of purchasing managers’ sentiment fell to 48.5 in August, from 50.1 in July. A figure below 50 indicates a contraction in activity. Overall new orders and new export orders declined. Purchasing managers also indicated that they were buying less material for future production and were keeping smaller inventories of finished goods on hand, apparently in anticipation of weak sales.

Leif Eskesen, HSBC’s chief economist for India and Southeast Asia, cut his forecast for Indian economic output to 4 percent for the Indian fiscal year through the end of next March, from a previous forecast of 5.5 percent. He also cut his forecast for the following fiscal year to 5.5 percent, from 6.6 percent.

“The recovery is likely to prove protracted as confidence will only return reluctantly, and the structural reforms will only pass through to growth very slowly,” he said in a research report.

Julian D’Souza, the South Asia director in the Mumbai office of the Conference Board, a group based in New York that issues leading economic indicators, said many manufacturing industries were hobbled by high transport and electricity costs. But auto parts factories tend to have modern equipment and good locations close to ports.

“That’s one area where India can start exporting,” he said.

American and European auto parts makers are already facing heavy competition from China, however, so further exports from India might fan trade tensions.

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