Rupee fall: Ben Bernanke can do what the FM & RBI failed to achieve

Govt measures have failed to stem the outflow of dollars despite succesive measures

The scene seems straight out of a B grade Bollywood movie, where the doctors are trying their best to revive the patient but the pulse rate continue to slide. Outside the operation theatre, friends and family are frantically praying for a miracle to bring the patient back to life.

Indian rupee is the patient in this case while the FM and the Governor represent the doctors. Meanwhile, citizens, especially market participants are praying for some signs of revival.
 

But the succesive measures, some of them really shocking, have failed to stop the rupee slide against the dollar.
 

This time around, even the dose of higher interest rates have not worked. Though yield on benchmark Indian 10 year bond has touched 8.55% and the bond yields have now inverted (shorter term interest rates are now higher than longer terms one), arbitrage money (dollars) have not found their way to the country.
 

And the reasons are not hard to find. US interest rates have moved higher. 10 year US paper is now giving a yield of 2.78%, after touching a one year high of 2.81%. Stronger economic numbers have increased the scope of tapering of bond purchases by the Federal Reserve in the US. This means that the liquidity tap which were keeping world markets higher, including India, is likely to be tightened. In such a scenario, money is expected to flow out of emerging and troubled markets to stronger and home markets of the currencies. India ranks amongst the worst markets in the world.
 

RBI and the finance ministry has worked overtime in the recent past to control the rupee. Even the recent measures to further prevent gold imports and increase foreign debt funding has not helped in preventing the slide. Money continues to flow out of the country, with nearly Rs 7,000 crore moving out of the debt market, which is over and above the Rs 44,000 crore of debt investment leaving the shores in the previous two months.
 

This debt money that is leaving the country has little to do with the economic performance and governance. Larger blame can be attributed to interest rate arbitrage and liquidity. It is only concerned with the action and inaction of the FM and Governor on the interest rates. If the spreads are not attractive, the money will stop coming. Currently, though the interest rate differential is a little below 6%, the high cost of hedging, due to high volatility makes arbitrage unattractive. In other words, outflow of money is likely to continue irrespective of what our FM or our Governor does.
 

What can probably stop this flow depends on what the Fed Chairman, Ben Bernanke does. If he continues with the quantitative easing, liquidity flow can continue and there can be some hope of money coming to India. Otherwise,the only possible way of reviving the rupee would be via direct intervention by the RBI. This, in our Bollywood scenario would be akin to a mouth-to-mouth resuscitation.