You are here: Home » Markets » Opinion
Business Standard

Elections: What lies ahead for the rupee

Tapering has triggered some FII outflows from Emerging Markets in general

Devangshu Datta 

The tapering of the US Fed’s Third Quantitative Expansion (QE3) is now well under way. The US is seeing an economic recovery, which means the Fed can accelerate the taper if it chooses. The tapering has triggered some foreign institutional investor (FII) outflows from emerging (EMs) in general, with India being an exception, in that FIIs have been strongly net-positive on India.

In investor jargon, the “Fragile Five” are the large EMs of Brazil, India, Indonesia, South Africa, and Turkey. These nations have varying degrees of problems. Brazil has slow growth, Turkey is in a difficult currency situation and suffering political turmoil. Indonesia and India are the fastest-growing of the five. Both Asian countries are due for general elections. India has seen massive FII inflows in the three weeks since the election schedule was announced.

India came close to a crisis in 2013. The current account deficit (CAD) hit dangerous proportions and the rupee came under pressure. The central bank organised a series of forex swaps for crude oil importers and the government imposed gold import controls. India now seems to have averted any immediate dangerous of a run on the currency and the CAD has also fallen sharply. The rupee has appreciated and there have been accretions to forex reserves.

The Indian CAD is still very high in terms of gross domestic product (GDP). There could be renewed pressure on the rupee if the FII attitude changes and there are large outflows. Arguably, as happened in 2013, that would lead to currency weakness again and this would help exports. So, the macro economic situation would probably be manageable.

However, there are quite a few Indian companies with external commercial borrowing. Many of these are struggling due to poor earnings records, and they have received some respite since the rupee has stabilised. There aren’t too many options for refinancing these loans, since the Indian domestic banking sector is also under pressure. So, a sharp depreciation in the rupee could lead to quite a lot of turmoil and this is a constraint for the Reserve Bank of India (RBI). At the same time, RBI doesn’t want the rupee to appreciate too much since that would kill exports.

The need to manage the currency rate is further complicated by the need to control domestic inflation. The RBI cannot afford to cut policy rates — or at least, it cannot afford to cut substantially — until retail inflation stabilises below the targets it has set. Some political instability is also guaranteed while one government leaves and another takes charge.

Intuitively, pre-conditions exist for a great deal of currency volatility in the next few months. This could be two-way, with the dollar strengthening suddenly. Or one-way, with the rupee continuing to strengthen. The outcomes will vary with the political outcome.

In calendar year 2013, the rupee swung between 56 and 68 versus the dollar. It’s possible 2014 will see a similar range of swing. There could be a case for taking deep dollar-rupee currency options under the circumstances.



The author is a technical and equity analyst

Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Wed, March 19 2014. 22:44 IST
RECOMMENDED FOR YOU
.