After the recent market mayhem, the rupee has clearly coasted into serene waters. While the earlier route was partly based on genuine fears of an early pull-out of the third round of quantitative easing (QE3) and the accompanying fall in emerging markets, the fall of the rupee was undeniably a classic case of an overshoot. But a confluence of various positive factors has worked in rupee's favour, both in terms of underlying economic facts and a sea change in sentiment.
The sharp collapse of our monthly trade deficit from $19 billion levels just three months ago to $12 billion and lower for two months in a row has worked in favour of the rupee. Though a sharp collapse in gold imports helped reduce the deficit, an equally sharp rise in exports for two months in a row by around 12 per cent augurs well in terms of projections. A weaker rupee and a resurgent US and Euro zone seem to be propelling our exports. The rupee also got support from non-resident Indian (NRI) remittances and powerful positive guidance and orders from technology exporters. Sentiment got a further boost as the US housing sector stalled marginally in the wake of rising mortgage rates, as well as the Federal Reserve reiterated that QE3 would not be wound back unless unemployment falls towards the 6.50 per cent mark. This has dramatically changed sentiment towards all emerging markets and the rupee has benefited immensely from this change in mood. It also helps that the foreign institutional investors (FIIs) w
hich have been net sellers from June to August turned net buyers for about a billion dollars in September. The relaxation of the marginal standing facility (MSF) rates in early September also gave fresh hopes for a pro-growth stance, albeit with a measured gait with rupee in mind. The rupee has thus easily breached the 62-mark and looks headed towards even stronger levels.
The April to June current account deficit (CAD) figure at $22 billion actually gives a lot of hope for the full year number to record well below the target of $70 billion. The second quarter of FY14 itself is expected to see half the number recorded in the first quarter. A stabilising rupee could also provide further room to reduce MSF rates, which could be a growth booster. The markets are also tracking the inflows from the twin windows of concessional swap opened by the Reserve Bank of India (RBI) for foreign currency non-resident (bank) or FCNR(B) deposits and overseas borrowings by banks. With about $3 billion already done, markets are hoping that this would be resounding success, helping to boost rupee sentiment, as well as increasing the rupee liquidity. The budget impasse in the US is in a perverse way is going to benefit emerging markets. A couple of weeks of shutdown could shave off the US GDP growth by about 25 basis points, and unemployment numbers could also edge up. This, along with the debt limit issue still unresolved and the new Federal Reserve Governor yet to be appointed, could dilute chances of an early and sizeable cut in QE3, which could prolong the positivity regarding emerging markets and their currencies.
Exporters have still to hedge their receivables in a big way, given the high premiums of Rs 5 prevailing for a year. The rupee would thus strengthen to 60-levels when exporters start hedging. Markets are also factoring in gradual flows into the disinvestment list, as well as FDI flows for recently-cleared proposals to help the rupee. An easing geopolitical atmosphere could also lay the foundation for lowering crude prices, making a material difference to our CAD. Having said this, the markets would nervously also watch the October 17 deadline, when the US debt limit would need to be revised upwards, as any inability to get it done could lead to a rise in US interest rates and change the risk-on mood.
The author is treasurer, FirstRand Bank, India
The sharp collapse of our monthly trade deficit from $19 billion levels just three months ago to $12 billion and lower for two months in a row has worked in favour of the rupee. Though a sharp collapse in gold imports helped reduce the deficit, an equally sharp rise in exports for two months in a row by around 12 per cent augurs well in terms of projections. A weaker rupee and a resurgent US and Euro zone seem to be propelling our exports. The rupee also got support from non-resident Indian (NRI) remittances and powerful positive guidance and orders from technology exporters. Sentiment got a further boost as the US housing sector stalled marginally in the wake of rising mortgage rates, as well as the Federal Reserve reiterated that QE3 would not be wound back unless unemployment falls towards the 6.50 per cent mark. This has dramatically changed sentiment towards all emerging markets and the rupee has benefited immensely from this change in mood. It also helps that the foreign institutional investors (FIIs) w
hich have been net sellers from June to August turned net buyers for about a billion dollars in September. The relaxation of the marginal standing facility (MSF) rates in early September also gave fresh hopes for a pro-growth stance, albeit with a measured gait with rupee in mind. The rupee has thus easily breached the 62-mark and looks headed towards even stronger levels.
The April to June current account deficit (CAD) figure at $22 billion actually gives a lot of hope for the full year number to record well below the target of $70 billion. The second quarter of FY14 itself is expected to see half the number recorded in the first quarter. A stabilising rupee could also provide further room to reduce MSF rates, which could be a growth booster. The markets are also tracking the inflows from the twin windows of concessional swap opened by the Reserve Bank of India (RBI) for foreign currency non-resident (bank) or FCNR(B) deposits and overseas borrowings by banks. With about $3 billion already done, markets are hoping that this would be resounding success, helping to boost rupee sentiment, as well as increasing the rupee liquidity. The budget impasse in the US is in a perverse way is going to benefit emerging markets. A couple of weeks of shutdown could shave off the US GDP growth by about 25 basis points, and unemployment numbers could also edge up. This, along with the debt limit issue still unresolved and the new Federal Reserve Governor yet to be appointed, could dilute chances of an early and sizeable cut in QE3, which could prolong the positivity regarding emerging markets and their currencies.
Exporters have still to hedge their receivables in a big way, given the high premiums of Rs 5 prevailing for a year. The rupee would thus strengthen to 60-levels when exporters start hedging. Markets are also factoring in gradual flows into the disinvestment list, as well as FDI flows for recently-cleared proposals to help the rupee. An easing geopolitical atmosphere could also lay the foundation for lowering crude prices, making a material difference to our CAD. Having said this, the markets would nervously also watch the October 17 deadline, when the US debt limit would need to be revised upwards, as any inability to get it done could lead to a rise in US interest rates and change the risk-on mood.
The author is treasurer, FirstRand Bank, India