No Hawk or Dove , but Vigilant Owl !!!

Rajan Effect … 

In a stunning show of resilience , rupee barely budged last week when some of the emerging market currencies tumbled  in response to Fed’s taper gaining traction  ( taper means simply this :  Fed’s plans to reduce stimulus by cutting down its monthly bond purchase program)   . What has gone largely unnoticed is how rupee emerged unscathed in an all out attack on some prominent emerging market currencies last week . A potential crisis has been averted for rupee , yet no  whispers  in the markets . Much of the credit for this rare moment  goes to the “vigilant owl” that heads our central bank now . Guessed it right , it is Rajan Effect . Here are the visuals that captures this effect brilliantly.

rupee charts

It is striking to note the contrast between these two charts . First one shows rupee’s extreme vulnerability during Aug’13 when the tapering tantrums (risk)  hit the markets for the first time . Rupee was one of the worst performing currency then in the emerging market basket with over 25%+ fall in a single month. Debt markets saw an outflow of over $ 12 bn+ causing some noble pundits to write obituary to India story . It has come a full circle now . We are well into the IInd installment of tapering . Fed has already reduced bond purchases by  $10 Bn in Jan and well on its way to reduce another $10 bn in this month .  Fed’s reiteration that it is on track to end the bond buying program completely by end of this year rattled the currency markets once again last week . Argentine Peso crashed by 23%+ and Turkish Lira over 10% . South African Rand , Brazilian Real and Russian Ruble were not spared ( as can be seen in the above chart). Amidst this turmoil , rupee stayed calm and refused to make headlines . It is now one of the best performing currencies in the emerging market basket over last 2 months .

While analysts attribute many reasons for rupee’s remarkable resilience including fall in current account deficit ( CAD ) and rise in reserves (by $ 30Bn) from FCNR deposits program , there is one reason that stands out . It  is  the faith and the confidence that the global investors have reposed on the new RBI Governor . One doesn’t need to look too far to fathom this  . The gauge that reliably reflects the global investors changing mood is “debt flows”. In an ironical twist , when the money is rushing to “flight to safety” from other emerging markets , India saw  net inflows of $2Bn+ in debt markets this calendar year . This is for the first time , debt flows have turned positive since May’13 when the infamous rupee crisis started.

This is no mean achievement for the vigilant Owl . Central bank (RBI)  is in safer hands now . Add to this the prospect of new political dispensation at the center post elections in May . If such prospect fructifies , India story could be back in vogue much sooner . It goes without saying that such a prospect augurs well for India equity story as well  . This does not mean that it will be one way up  here on . Of course , both currency and equities will remain vulnerable to volatile capital flows in the short term . It will not be a surprise if rupee cracks a little  if the emerging market crisis deepens and impacts equities . Long term investors should use every   correction ( in the equity market)  as an  opportunity to build and structure their portfolios for the eventual turn of tide . Watch out for interesting times.

Happy Value Investing !!!

ArunaGiri . N