Last couple of weeks would be marked in the history of INR’s
(rupee) unpredictability with respect to the American Dollar ($) as the most
volatile phase. In the emerging markets INR was the second worst performing currency
w.r.t. American Dollar only after Chinese Yuan.
Going through various reports and analysts’ views it has
already been established that a country with approximately as wide as 6% of GDP
of the Current Account Deficit (CAD) this currency depreciation would add
insult to the already injured economy which is battering with slowing demand
for goods and services across globe and reeling with high inflationary effect
(CPI) in the domestic economy. Keeping all the factors in mind and considering
that the country is facing with the twin deficit problem for quite a long time
now (not significantly new problem for past 24 months) what has led to this
Indian Rupee depreciation suddenly? Why in the last couple of weeks debt
portfolios have been the net sellers and the equity portfolios have been stable
with persistent inflows to finance our CAD?
Uncle Sam’s recovery (though slow but steady) has boosted
the American Dollar’s appreciation:
- · Fed’s Bernanke has indicated the drying up of the asset purchase which stands today at around $85b/month, involving assets like Govt. securities and Mortgage Backed Securities.
- · Sentimental boost for the people across globe that the American economy is back on track with more number of people getting employment but still the unemployment percentage ranges from 7.5% - 7.8%, well below the target set by Fed before the dry up of asset purchase at 6.5%.
- · And slow yet steady GDP growth coupled with Chinese shaky growth momentum and the Industrial production data clarifies the tectonic impulse.
The only factor why the capital inflows in the emerging
markets for last few years had been steady was the low interest provided on the
money invested in the developed countries but with the mentioned points above
it is believed that the sole advantage of interest rate spread would narrow and
the American Securities in the coming period would provide better yields on the
investments, leading to drying up of the capital inflows in the EM like India.
This adds up to the worry of financing our huge deficit. RBI
Governor has iterated number of times that relying on debt to finance our CAD
is not a great idea and it has been proved with the new breeds of foreign
traders in the debt market that the volatility on the debt investors is
questionable and can affect the domestic currency severely. (FII proprietary
debt investors)
Leading to the fact that what India needs at this point in
time is a reliable source of financing its CAD which can act as a support for
the domestic currency and economy’s revival. This can solely be possible if the
foreign investors feel comfortable/safe by investing their money in India for a
long period of time through Foreign Direct Investments or through controlling
more stakes in the sectors which needs capital like in defense and insurance.
This can only be possible if the Govt. is committed to improve the economy’s
condition by taking actions on reforms but this seems like an elusive dream now
with less than a year left for national elections.
So its all about external
factors coupled with domestic reform paralysis which will guide the rupee in
the coming months, so better get used to drastic movements of the domestic
currency and take appropriate hedges.
