After touching an all-time low of 68.80
on 28 August 2013, the Indian rupee has resurrected miraculously to 63.48 by
13Sep2013 against the US dollar. The amazing upsurge of rupee by almost eight
per cent in just a matter of two weeks has been attributed to various reasons. In
this backdrop, let me try to dig deeper and come out with my own theory.
As explained simply in the above
graph, various reasons could be attributed to the rise of rupee in the last two
weeks. All these things, we’re able to tell with the benefit of hindsight. If
you’d asked the finance minister P.Chidambaram what went right with the rupee, he would have smiled very confidently and
responded by saying that “I told you so!” If you’d asked the so-called market
experts they would say it was the “Rajan Effect.”
It was global factors such as oil
prices cooling off following the US
postponing its potential attack on Syria , others would argue. Some
even attributed rupee’s recovery to India ’s trade deficit easing a bit
in August 2013. The overwhelming rise in Indian stock markets too helped the
rupee gaining ground; and in fact the reverse is also true! Global markets too
have rallied smartly last week. Media headlines often don’t tell the full
story.
The “Rajan Effect”:
Upon taking over as RBI governor,
Raghuram G Rajan announced a raft of measures—which inter alia include, fast
tracking issue of new bank licences, window for banks for swapping FCNR (B)
deposits, and freeing bank branch licensing. The speed with the new governor
has acted has positively surprised the markets. The rupee strengthened and the
stock markets soared. It remains to be seen how long this optimism lasts.
The RBI may have definitely
intervened in August this year also, by selling dollars and propping up the
rupee. Between May and July this year, RBI sold US dollars worth $8.34 billion
in the foreign exchange market. The August figures will be known next month. RBI’s
foreign exchange reserves are $275 billion, down $17 billion since Mar2013 end.
See my piece: What to Expect from
Raghuram Rajan?-04Sep2013:
Syrian Crisis on the Mend:
The US
was planning to attack Syria
a few weeks back. The US has
now postponed that plan after Russia
intervened in the matter. Russia
has proposed a plan to put Syria ’s
chemical weapons under international control. It was earlier feared by the
markets that any US attack
on Syria would spread Syria ’s
bloody conflict to the entire middle-east, jeopardizing the prospects of global
economy.
An internal war has been going on
in Syria
for more than two years between President Assad’s government forces and rebels;
the latter are supported by several western nations. Reports indicate that
chemical weapons were used last month in Syria killing hundreds of people. The
United Nations is investigating the matter. Since 2011, more than 100,000 people have
been killed and 2 million have been displaced.
RBI-BOJ Bilateral Swap
Arrangement (BSA):
On Sep62013, Reserve Bank of
India and Bank of Japan decided to increase their bilateral swap arrangement
(BSA) from USD15 billion to USD50 billion. This facility enables both nations
to swap Japanese yen or the Indian rupee for US dollars in emergency
situations. It irons out short-term liquidity difficulties for India and Japan . The BSA is expected to lend
stability in financial markets. In fact, the increase in the facility has
boosted the confidence and partly contributed to rupee’s appreciation against
the dollar. The BSA was first signed in 2008 for $3 billion, but was later
increased to $15 billion in December 2012 when the facility was renewed for a
three-year period.
RBI’s Swap Window for OMCs
The Reserve Bank on 28Aug2013
offered a temporary swap window facility for public sector oil market companies
(IOC, HPCL and BPCL) to enable them to buy or sell US dollars. With this, OMCs
are out of the foreign exchange market reducing the dollar demand. The OMCs’
demand per month is said to be around $9 billion.
To Sum Up:
We can’t definitely point out the
real reasons behind the rupee’s rise. It could be a combination of factors—wild
swings in investor sentiment, the slew of measures announced by the RBI, FIIs
coming back to India
once stocks become cheaper, OMCs going out of the foreign exchange market or
some factors unknown to us!
The fact of the matter is: We
don’t know for sure. It’s in the nature of markets to swing between moods of
downright pessimism and lofty exuberance. As George Soros put it in his book The Alchemy of Finance: “The stock
market is generally believed to be anticipating recessions; but it would be
more correct to say that it can help to precipitate them. Markets are always
biased in one direction or other. Markets can influence the events that they
anticipate. Markets have a way of making predictions come true!”
Where is Rupee Headed in the
Midst of a Weak Leadership?
Crisil has cautioned that the
collapse of the investment cycle will hamper infrastructure, capital goods,
automobile and real estate sectors. Highly-indebted companies will suffer more,
with tight liquidity, stretched working capital cycles and increased interest
burden. Crisil has further stated that rupee depreciation will help IT-ITES,
pharmaceutical, textile, garment and other sectors, easing the current account
deficit. Agriculture growth may improve to 4.5 per cent, easing food prices and
supporting rural consumption.
Fiscal deficit may not be under
control in the pre-election year. What India lacks is effective
leadership. This has seriously undermined public institutions. Nobody seems to
take any responsibility or accountability. If you ask the prime minister, he is
putting the onus on global factors. If you ask the finance minister P
Chidambaram, he’s pointing out the fingers at ex-finance minister. But the
newly-retired RBI governor D Subbarao squarely blamed the central government
for the current economic conditions. But who are the real culprits, you may
wonder. I could say each one of them and some more (f)actors.
A noted economist Bibek Debroy
recently tweeted: “Domestic actors not domestic factors are responsible (must
be a typo).”
The fate of Indian rupee largely
hinges on the fortunes of Indian economy. Of course, we can’t rule out global
factors also. The rupee will continue to be volatile driven by external and
internal factors. Some sense seems to have come to the rupee market in the last
two weeks. While the positive sentiment may continue in the short-term, it’ll
be back to basics in the medium to long term. Crisil has said that the rupee
may rebound to 60 per dollar by March 2014. I tend to go with that figure, with
plus or minus two.
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Related Articles:
Strengths and Weakness of Indian
Economy-01Sep2013:
Recognition of Good Governance by
PM-15Sep2012:
Disclaimer:
The author is an investment analyst, equity investor and freelance writer. This
write-up is for information purposes only and should not be taken as investment
advice. Investors are advised to consult their financial advisor before taking
any investment decisions. These are personal his views. He blogs at:
Connect
with him on twitter @vrk100
