How the Rupee went from 54 to 50 against Dollar in one month

Category : NISM-Currency Derivatives

Source: Original article from www.firstpost.com with additional inputs from Intelivisto team.


Whoa!!! The Rupee seems to have turned into an adrenaline junkie as it hurtles itself from highs to lows practically every few months.

After hitting an all-time low of 54.30 against the US Dollar on 15 December, the Rupee jumped to close at 50.73 on Tuesday — a two-month high. In fact, over the past 32 days alone, the local currency has appreciated close to 7 percent. That’s after it tumbled about 17 percent against the greenback in 2011.

The antics of the hyper-active Rupee will, no doubt, be giving currency experts and corporate strategists some sleepless nights as it becomes increasingly challenging to estimate where the Rupee will be at even the end of the next 30 days.

So, what caused this remarkable turnaround in the Rupee? And that too, when RBI is gradually deviating itself from practicing of direct selling of Dollar in the market to control the rates. RBI has clarified a few times recently that they have no intent to let the currency be driven by motivations or by forces other than fundamental demand-supply.

It seems like only yesterday the doomsayers were predicting the Rupee could plunge to 57 against the Dollar soon. While that threat still remains, for now, the current form of the Rupee seems to be on account of five key factors.

One, intermittent intervention by the Reserve Bank of India (RBI) by curbing re-booking of forward contracts involving Rupee; to reduce volatility and speculation in the foreign exchange market has helped remove the froth off speculation — and provided some support to the Rupee. After the Rupee hit its lifetime low in the last month of the year 2011, the central bank introduced curbs on currency contracts, which reined in the ability of speculators to bet on the downward movement of the Rupee. Those measures seem to be having a salubrious effect on the Rupee.

Two, the freeing of interest rates on non-resident Indian (NRI) deposits by the RBI last year allowed banks to raise rates on such deposits, which attracted large flows from NRIs. Higher interest rates of 8.5-9.5 percent compared with near-zero levels in their countries of residence prompted NRIs to send more funds to India, which eased a Dollar supply shortage and contributed to improving the Rupee’s value.

According to this Economic Times report, inflows into NRI deposits rose to a record $ 1.78 billion in November. NRIs have brought in a total of $ 6.4 billion so far this fiscal, between April and November, compared to a mere $ 2.2 billion a year ago. The bulk of these inflows happened after August — when the Rupee’s value started tripping.

Three, foreign portfolio investments have jumped sharply recently after RBI raised the limits for FIIs’ investment in bonds, which has added to improving sentiment on the currency. Foreign funds raised holdings of Indian debt by $ 3 billion this month to a record $ 29.1 billion as on January 13, while investments in stocks rose by $ 559 million, according to Bloomberg.

After a terrible 2011 in which Indian stocks wiped off 25 percent of their value, stocks are now very attractively valued, according to experts. The increasing chances of an interest rate cut in the months ahead and a growing sense that the economy may have bottomed out and some rebound is due this year are tempting foreign investors to once again bet on India. So, investments in equity have increased. Higher interest rates and a relaxation in debt investment limits were already attracting foreigners in droves to invest in local debt.

Four, the government hiked import duties on gold and silver on Tuesday, Jan. 17th 2012 which helped the Rupee cross the 50-against-the-Dollar- threshold as traders became confident that the measure would discourage imports of both precious metals.

Gold and silver are the second-most expensive items on India’s import bill after petroleum products. High imports of both metals have contributed to the country’s widening current account deficit (the gap between foreign exchange earnings and payments before taking into account capital flows), which has piled pressure on the Rupee. A current account deficit indicates more demand for foreign exchange than what is earned, which weighs on the currency. When the import duty hikes were announced, the Rupee jumped to 50.91 within minutes.

Five, easing inflation, evident by steadily declining food inflation, clearly indicated that tightening interest rate regime has come to its optimum level after significantly affecting growth and developmental process of the country; and central bank may likely embark to rate cut spree in days coming ahead. With growth and investment prospects taking centre stage again, there has been a hopeful environment that RBI will eventually announce rate cut, guiding economy back to northern trajectory with strengthened Rupee.

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