The rupee’s continuing troubles

November 13, 2013 01:53 am | Updated November 16, 2021 08:01 pm IST

The rupee is in trouble, yet again. The currency has been sliding in the last five trading sessions, to close at Rs.63.71 versus the dollar on Tuesday. A convergence of unfavourable factors appears to be behind the renewed fall in the currency after the relative stability of the last few weeks. The immediate trigger was the positive news emerging from the U.S. The global economic engine last week reported a better-than-expected 2.8 per cent growth in the third quarter ended September. This was immediately followed by encouraging non-farm payrolls data which showed that more jobs were added in October than expected. These data have set off fears that the Federal Reserve might start the tapering of its $85 billion monthly bond-buying programme as early as in December or January. Foreign institutional investors have turned net sellers in the domestic market in the last few trading sessions. It is not coincidental that since November 6, the day the rupee lurched into its latest turbulence, FIIs have sold $438.50 million in the debt market. The return of fears over tapering is strengthening the dollar against other Asian currencies as well, as global fund flows head back to the U.S. in anticipation of rising bond yields.

There are a couple of domestic factors too that seem to be working against the rupee. The most important of these is the partial closure of the special window that was opened by the Reserve Bank of India (RBI) for oil companies to buy their dollars directly from the central bank. With apparent stability prevailing over the last few weeks, the RBI pushed back into the market almost half of the oil companies’ dollar requirements, causing demand for the greenback to rise. Also, a couple of special measures initiated by the central bank at the peak of the crisis to support the rupee by attracting dollar inflows, such as the swap window for foreign currency deposits, are supposed to close by the end of this month. These factors, along with the possibility of the Federal Reserve starting the tapering process, point to a period of weakness ahead for the rupee. The RBI may well find itself forced to extend some of the supportive measures put in place earlier. What is heartening though is that there has been a perceptible improvement in the external account since the last round of volatility a couple of months ago. Trade data for October, the latest available, show acceleration in exports and a significant fall in imports; if these trends sustain, the current account deficit, which was acting as a drag on the rupee during the last spell of volatility, could be around $60 billion or 3-3.2 per cent of GDP. Yet, this may not be enough to support the rupee if FIIs decide to take their money back to the U.S.

0 / 0
Sign in to unlock member-only benefits!
  • Access 10 free stories every month
  • Save stories to read later
  • Access to comment on every story
  • Sign-up/manage your newsletter subscriptions with a single click
  • Get notified by email for early access to discounts & offers on our products
Sign in

Comments

Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.

We have migrated to a new commenting platform. If you are already a registered user of The Hindu and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.