Run on the Rupee !!!

Hardly a day goes by without a new reason to be gloomy about Rupee and about Indian macro  .  When  mainstream television debates ( not business media)  find what is happening to Rupee “sensational” , it is time to look up and take notice . Not to mention the flooding articles like “ All you wanted to know about Why rupee is falling” , “Ten reasons for the  fall in rupee”  etc that flash day-in and day-out on news channels . Before you continue reading this , here is the caveat : If you are one of those looking for where Rupee is headed next , this is a wrong place to find any such magical answer . But . in this manic mayhem , if you are one who is looking for a crutch to hold on to your sanity , it is unlikely that you will be disappointed .

In markets , every trend starts with a rational trigger , but soon technicals take over . When trend gets hijacked by momentum ( technicals) , reasons or fundamentals rarely hold .  So is the case with the current mayhem in Rupee . Otherwise , how does one explain this dichotomy – If CAD (current account deficit) was the sole reason for free fall in rupee , it should have cracked last year when CAD was much worse with sky-rocketing gold imports ( exceeding 5% of the GDP) . Even the pessimistic forecast for current year is sub-4% on easing  gold imports and on falling demand . So the problem is not so much of CAD per se , but the ability/ visibility  to fund the deficit  . Comfortable flows (FIIs flows) last year kept the rupee artificially high . Now , on fears of receding flows on QE (quantitative easing) tapering ,  funding looks shaky and hence weakening rupee . That explains the  rational  trigger for the initial fall in rupee to 58 odd level in May-June . Beyond that , it is  “technical” that holds the rupee to ransom .

Technicals work in a bizarre way . While the role of punters / speculators are well known in momentum trade , what is invisible , yet more powerful is the lemmings behavior (herd) of other genuine market participants that accentuates the trend and makes it a self fulfilling cycle . Take the case of behavior of genuine exporters / importers in the current rupee fall . Importers rushing in to buy dollars while exporters holding back their dollars , both on fears of further fall in rupee , thus reinforcing the trend ( so is the case with the remittances) . This added with extrapolation noise from financial community , the whole eco-system works towards achieving the next target set by extrapolation experts from the brokerages . That is how an empty trend becomes all consuming and eventually shakes the conviction of even of the long-term fundamentalists . Not to forget that such a lemming behavior is orchestrated globally as can be witnessed by steep fall in all emerging market currencies in the current meltdown . Aggressive speculative bets in NDF market overseas ( Non-Deliverable Forward market where rupee bets are settled in dollars) made things worse . In such a situation , reasons rarely work . That is one of the reasons why most of the RBI’s or Govt’s measures backfired . In fact , these measures created an an opening  for such a similar momentum trade in bond markets where bond yields rose sharply , initially triggered by RBI’s liquidity measures , but later got accelerated by the self-fullfilling cycle of  new investors holding back from debt funds while old investors rushing for redemptions , thus ending in bond market crash.

Such trends do not last for ever  though . Soon it regresses back , yet timing of which can’t be predicted  . But while it lasts , it is painful and takes a toll vide MTM ( notional marked to market) losses on one’s portfolio   . This is not to argue that all is well  for Indian rupee . Of course macro looks murky and on fundamentals , there is nothing much to cheer for rupee . At the same time , on technical factors , current fears are overdone and sharp reversal on some vague triggers can’t be ruled out . Any signs of reversal in FII flows could be one of them , but need not be limited to only that .

Ironically , flows might reverse at the first signs of stability in rupee as foreign investors rush in to capture the rupee upside besides cheap bond and stock prices . Wise investors understand that it is futile to predict the timing of such a turn and instead focus on capitalizing  the opportunities that are thrown both in bond and equity markets on fears of crashing rupee .  If that is a difficult proposition for any one , the least that they should do is  not to  scoot and run ( panic redemptions / exit from either equity or debt funds) , which , needless to say , is suicidal.

Happy Value Investing !!!

ArunaGiri . N


4 thoughts on “Run on the Rupee !!!

  1. ravi August 22, 2013 / 5:01 am

    thanks arun it was worth its read

  2. Arvind August 23, 2013 / 12:21 pm

    hi Giri, good read indeed. cheers, arvind

  3. Sundar Iyer August 24, 2013 / 5:19 am

    Excellent Article , weel articulated. Great

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