5 reasons why rupee recovery may not last

Rupee has strengthened but is this sustainable.Or are we staring at a slip very soon

One of the primary reasons for the recovery in the equity markets was stability and recovery in the currency market. Rupee has recovered nearly 11% since RBI governor Raghuram Rajan introduced measures to stem the slide. The currency also received help from Federal Reserve chief Ben Bernanke when he announced postponing of the tapering (its liquidity infusion) program.
 

The rupee was within sniffing distance of 70 but has since recovered and currently trades at 61.50. The on-going shutdown in the US has also raised hopes that tapering would be postponed further, giving markets a leg-up.
 

So are we out of the woods or is this just a pause before the slide continues.
 

It is clear that the measures taken by the central banker and the events that have unfolded are all time-bound. What the rupee has got is only some breathing time.
 

Here are five reasons why the rupee will continue on its ride downwards
 

1)       The main reason for the recovery of the rupee was introduction of a ‘subsidised’ FCNR (B) deposit scheme and a bank borrowing limit that was increased to 100 per cent. These were time bound instruments which expire in November 2013. A smart influx of dollars due to these measures is responsible for bringing some sanity in the currency market. But what will save the rupee post this expiry date.
 

2.       Tapering has been postponed by a few months. US cannot afford pumping the economy with more liquidity, especially since it is refusing to move up despite availability of easy money. Analysts believe that tapering might start in December 2013, which can lead to outflow of dollars from India. Foreign investors have withdrawn $11.5 billion of debt investment since Bernanke first hinted at tapering. There is still $26.5 billion worth of debt investment pending which can exit regularly when tapering actually starts. Even if they do not, on a best case scenario, little money will come in.
 

3.       Shutdown in the US cannot be for an unlimited period of time. If there is no consensus by October 17th, all hell will break lose. A compromise before that date would mean a firmer dollar as compared to other currencies, including the rupee. If no compromise is reached by that date, a defaulting US can set off a tsunami which will make the 2008 crisis a walk in the park.
 

4.       India’s high current account deficit makes it one of the most vulnerable emerging market countries. Though government has tried to manage it by controlling gold imports, it is only a temporary measure. Rising imports and falling exports will keep CAD high, especially when US and China are likely to slow down further and gold imports rise again as restrictions are eased.
 

5.       The year end will see election fever at its peak, with politicians scaring the markets with their speeches and ideas. This time around, rhetoric and political posturing are expected to touch a new high. Freebies and social schemes will be announced in abundance. These will be enough to scare any sane investor away from the markets.
 

As the time for changing the calendar approaches and we wait for a new one from Kingfisher (will there be one next year?), India will have few things going right for it. Bernanke helped us to buy time and bring the economy back on the growth path but it looks like, we are again going to waste it.  Time they say is money, we are running out of both and at a fast pace.