Semblance of Sanity !!!

Is recovery in Rupee here to stay ??

August was a block-buster month for financial pundits . It was a busy season for these stalwarts for pumping up endless predictions  . Not to be left behind in the rat race , each one was outdoing one another in downgrading both the currency and the country’s rating . With rupee and stock markets  dancing to their tunes ( by plunging)  , it was a self feeding loop that degenerated into  a downward spiral for both markets . Pundits getting  vindicated by the market’s gyrations , let  their guards off hurriedly to project a even more risky and sensational level day after day in their forecasting lineup  .  Predictably ,  the party didn’t last long for the pumped up pundits .

Proving all naysayers wrong , rupee bounced back quite smartly in mid September  to stabilize around current levels of 62 . Rarely has the market seen such a high dose of predictions falling apart in quick fashion in such a short timeline . While it may be too soon to pop the champagne , there is no denying  that the worst may be over for the currency and hence for the markets.  This renewed confidence on the currency stems from the following pointers:

  • First and foremost , the risk of potential further outflows even on sizable QE tapering (quantitative easing) as and when it happens stands much diminished now  . The reason being the significant reduction in FII debt portfolio in India post the July/Aug turmoil . Much of the outflows that triggered the mayhem in rupee in July/Aug  has been from the FII’s debt portfolio which saw a dramatic fall from about $ 22Bn to 12Bn whereas the equity outflows were marginal at around 3Bn . Not to forget that the net outflows in equity comes down to a meager $1 Bn if one factors the net inflows of about 2 Bn in Sept . Further , given the fact that the share of debt has been reduced to less than 6% in the overall FII outstanding Indian investments of around 200Bn (appx) and given the sticky nature of equity investments ( long-only funds) , the risk of sudden surge in outflows even on larger QE tapering has  subsided to a very large extent.
  • RBI’s recent unconventional measures like SWAP window for oil payments ,  FCNR and Forex swaps ( for banks)  have proved to be extremely effective in tackling volatility in rupee compared to earlier unsuccessful liquidity tightening measures  . Rupee’s continued stability even after partial reversal of liquidity tightening measures ( reduction of 75 bps in MSF (marginal standing facility)  limits  in the recent monetary policy) reflects underlying strength .
  • Improving global growth prospects led by US with Europe and China not far behind , have brightened the outlook for exports for India and thus should help mitigating fears on ballooning current account deficit . Sharp fall in trade deficit in Aug is a case in point .
  • Fed’s recent decision to tone down the noise on QE tapering ( deferring the tapering schedule) has lifted the pressure on emerging market currencies and thus helping rupee to stabilize . Ironically , the more acute the ongoing budget crisis  in US ( govt. shut-down and impending debt ceiling) , the better it is for emerging market currencies . The reason being the potential weakness in US outlook on debt ceiling debacle that could lead to further delay in the tapering plan.

This is not to argue that fundamentals have changed dramatically for rupee , which in our view continues to be patchy given the cloudy outlook for growth  . However the technical overhang that triggered a run on rupee has largely receded and some semblance of stability or rather sanity  has returned to the currency markets , giving the much needed  relief to RBI and policy makers  .

ArunaGiri . N