StatsGuru-17-June-13

Making sense of the rupee's fall against the dollar

The US Federal Reserve has indicated that it will at some point scale down its bond-buying scheme. As Table 1 shows, since May 2011 the amount of US Treasury bills outstanding has expanded vastly. But, as Table 2 shows, in recent weeks the yield on US 10-year T-bills has actually increased, as the end of quantitative easing is on the horizon. Meanwhile, 10-year Indian government security bond yields have fallen - meaning that the difference in yields is not as profitable for foreign investors as it was earlier.

This is a problem on several levels. It means that the support that foreign institutional investors have given the Indian debt market over the past three years, visible in Table 3, might taper off suddenly. As the amount for 2013 year-to-date in that table shows, it is already happening to an extent. This comes at a time when India is externally vulnerable - as Table 4 shows, the current account deficit as a percentage of GDP is in a very dangerous territory. Unsurprisingly, taken together with relatively high domestic inflation, the redemption of Indian bonds by foreign investors has also meant downward pressure on the rupee. To an extent this is common to many emerging markets, as Table 5 shows, particularly those dependent until recently on primary-goods exports. However, foreign investors have perhaps not soured on Indian equity to the same degree; there, too, the post-QE period has shown massive increases in foreign flows, as Table 6 shows. Partly that is because growth, slow by Indian standards, is still high by the standards of other destinations for capital, as Table 7 reveals. Thus the Sensex has not collapsed as much in the past two months as have many other major emerging-market indices, shown in Table 8. (Click here for table)