Rupee Outlook Remains Weak

The fear of the tapering of the quantitative easing has led to a huge fall in rupee and has ultimately pressed a panic button in the domestic capital markets. It seems that everybody is clueless at the moment on the economic action in the country. Owing to the the QE tapering news, Rupee has hammered in a big way and despite the RBI's action, the rupee is again sinking to the near historic level.

If one sees the FII flow in the country, then in last two months there has been net FII outflow from the country where as in the first five months we have seen net FII inflow. In June 2013, there was a total sell off of Rs 44162 crore from the equity and debt markets while in July there was a total sell off of Rs 18123 crore. Even on the first day of August FIIs emerged as net sellers in the country.

The brightening prospectus of the USA has attracted a flow of capital in their equity and debt markets. The US bond yields have rose from 2% to 2.6-2.9% on the expectation of the rate hike as well as recovery in the US economy. As US Bonds have one of the highest credit rating from the rating agencies, FIIs would be very happy to park their money in the US bonds rather than the bonds in the emerging markets such as India.

In the domestic markets, the government bond yields had declined to near 8% but have again rose due to the heavy selling. This coupled with the the rupee depreciation to the tune of 9-8% makes the FIIs less interested in the government bonds. The rupee slide has led to rise in the hedging costs for the foreign institutional investors. This is the reason that domestic debt markets remain oversold at the time.

Worsening these fears, the recent US data is also above the expectations. The GDP of USA for the second quarter of the calender year has grown at the rate of 1.7% over the consensus of 1% growth in the US GDP. This recovery in the US economy may further lead to the outflow of the capital from the countries like India. The US Fed has not tapered the QE at the moment. The most fearful factor is when US Fed will actually hit a stop button on the quantitative easing. One can only imagine at this time where the capital markets would be headed. No body even economist would know where the rupee would be headed in that case.

Achala Jethmalani, Economist at Nirmal Bang believes that the RBI in a way has been successful to curb the rupee volatility. The ultimate objective of the RBI was to curb the speculation. She believes that if RBI had not intervened then rupee may had gone down to about 65/dollar level. Achala also believes that there is nothing much in the hands of the government as well as RBI.

A few countries which are facing issues like these have raised the interest rates to attract the foreign capital. RBI however has a less headroom to raise the rates as we are coming out of the high interest rate regime. The government to is helpless due to the 'status quo' on the policy action. The nation is headed for an election and there is no clarity on the policy framework. “If we need to get the FDI inflows then we need to have a uniform policy framework which would give a very clear framework and will also attract the FDI in the country” cites Achala.