Markets nervous ahead of US Fed meet

Rupee ends stronger, partly due to Rajan's remarks, but gives up most of day's gains on general jitter

Despite a fall in emerging market (EM) currencies, the rupee ended stronger on Wednesday compared with Tuesday's close. However, it gave up most of the gains during the day on caution ahead of the policy outcome of the US Federal Reserve's committee meeting.

EM currencies slumped on worries that aggressive interest rate increases by Turkey and South Africa would not be enough to support markets, and as an impending policy decision by the US Federal Reserve added to jitters over global investing patterns.

Investors are worried the Federal Reserve, at the close of its policy meeting on Wednesday, could announce another trimming of the US monetary stimulus, something that could exacerbate the EM plunge.

The Fed is expected to cut monthly debt purchases by another $10 billion, after cutting it by the same amount in December.

Continued reduction in the US stimulus could curb the waves of cheap money which had benefited EMs such as India in recent years. Removal of the Fed's bond-buying had been a major factor in the EMs' sell-off because much of that money has flowed to the higher-yielding assets to be found in these markets.

The rupee ended at 62.42 to the dollar, compared with the previous close of 62.52. The rupee ended stronger because Reserve Bank governor Raghuram Rajan reiterated on Wednesday his belief that India was better prepared for foreign exchange outflows than in August, when the rupee tumbled to a record low of 68.85 to the dollar because of similar Fed tapering fears.

Currency dealers expect the rupee to trade in a broad range of 62-63 to the dollar on Thursday.

RBI also assured the Street that repayments for oil swaps that will come by end-March are well covered. "Between end-February and end-March, about 50 per cent of oil swaps will come due and beyond that, another 50 per cent. At this point, I can say that at least the repayments for March are well covered," said Rajan.

Though currency dealers believe the worst for the rupee is behind, if the Fed reduces its quantitative easing programme by another $ 10 bn monthly, that would likely put further pressure on EM currencies.

In another move, RBI, in consultation with the government, has enhanced the sub-limit available to long-term investors by $5 bn. This takes the limit to $10 bn, though the total limit for foreign institutional investors in government bonds remains unchanged at $30 billion.

The step is aimed at attracting dollar flows that shall remain in domestic markets for a longer time. In recent times, the currency has been volatile against the dollar due to short-term dollar flows leaving Indian shores.