RISING RUPEE, FALLING PESSIMISM

By Ruma Dubey

Dec 14th 2011: The rupee vis-à-vis the US dollar closed at Rs.53.71/72 after briefly hitting an all-time low of 54, which represented a drop of 3.7%from its close.

Jan 27th 2012: The rupee rose further by 60 paise within a single day at Rs.49.49 against the US dollar. A 2-1/2 month high.

In a just little time over a month, the rupee is up from Rs.53.71 to Rs.49.49 currently, an appreciation of Rs.4.22/US dollar.  It is currently the best performing currency in Asia.

So what has changed since then to today, for the rupee to show such a dramatic rise?

Quite a few factors. Call it the magic of the New Year or whatever but the moods all over seems to have made a complete U-turn. The Euro debt crisis is very much there but there is now hope that it might see some respite. The talk is that euro-zone governments might increase their contributions to Greece's debt deal and there is expectation that agreements could be struck soon to increase euro-zone bailout funds and IMF resources.

This apart, another international happening is the US Fed has given signals that it is unlikely to raise its benchmark interest rate before late 2014, extending its time frame by at least a year and a half. The Fed said record-low rates are still needed to help boost an improving but still sluggish economy. Bernanke also said that the Fed was ready to offer the economy additional stimulus. This is seen a huge positive for the Indian rupee as post this news, many traders and investors were seen moving out of the US dollar and investing in emerging economies where returns are currently perceived to be higher. The risk and uncertainty now seems to have dissipated. A direct reflection of this is the fall in gold prices, which usually goes up when risks around the globe are on the rise. When the risk appetite is low, gold rise and when risk appetite is higher, currency appreciates.

There is currently a sense of things looking up in India as the RBI has shown to the international community that it does not allow politics to rule its decisions. By reducing only the CRR and not bowing down to pressure of lowering rates, the message sent across is that it is firmly in charge and while it keeps a sharp eye on inflation, it is not rushing to undo what it has sought to do over the past 14 rate hikes. The signal sent is that it is concerned about growth too and coming months will usher in lower rates.

This change in sentiments is drawing funds to India, which in turn is helping shore up the rupee against the dollar. Overseas funds added $1.56 billion to equity in Indian markets till 24th Jan 2012 and debt to the tune of a record $29.5 billion.

Looking ahead, things for now hinge to a large extent on the developments in Greece- whether or not it reaches an agreement on restructuring its debt will decide the course of the rupee. Offshore forwards indicate that the rupee will trade at Rs.50.69 per US $ in three months, compared with expectations of Rs.51.54 at the end of last week.

Everyone makes predictions after a fall or a rise has begun but no one can truly predict before it happens or else many should have been able to see the Rs.53 level of Dec. We all can make only guesses – that’s the hard truth. But another equally good truth is that the moods have turned around for the good and hope it stays around – when things seem good, it does become good!