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The impact of the US Fed tapering on the rupee over 2014 is likely to be limited as market participants believe India is better prepared now with improved forex reserves and lower current account deficit (CAD). Experts say the rupee may slide a bit with bouts of volatility, but it is unlikely to touch the all-time low of 68.85 against the dollar on August 28, 2013. According to market participants, the worst case for the rupee is seen at 64 against the dollar due to tapering. The rupee had started its free-fall on May 22 after the US Federal Reserve first hinted at tapering. The decline reversed from early September after Raghuram Rajan was appointed governor of the Reserve Bank of India (RBI).
Sentiment was boosted also after foreign institutional investors (FIIs) pumped money into stocks and India has raised almost $34 billion between September and November when the central bank opened a special concessional dollar-swap window to attract Foreign Currency Non Resident (Bank), or FCNR (B), deposits, adding to the country’s forex reserves. The decline in CAD also helped the rupee hold ground.
“It is wishful to assume that quantitative easing taper and the resultant liquidity squeeze will not impact the Indian financial markets. While improved growth pick-up in the US is positive cue into long-term boosting, Indian exports and establishing downtrend in imported commodity items, there will be short term pressure on rupee, bond and equity markets mainly on squeeze in FIIs inflows combined with exit of leverages investments,” says Moses Harding, group chief executive officer (liability and treasury management) and chief economist, Srei Infrastructure Finance.
Rajan had assured the Street on various occasions that India was prepared to face tapering. “India utilised the delay in tapering to bring about adjustment in CAD and build buffers by replenishing its foreign exchange reserves. Consequently, external sector risks have been considerably reduced and the effect of the tapering on the economy is expected to be limited and short lived,” RBI says in its latest Financial Stability Report. The rupee has been very stable since December 18, when the actual announcement of tapering came. In fact, the rupee has appreciated by about 20 paise during this period.
Experts are optimistic. “The rupee will not be that much volatile as it was in 2013, but there might be bouts of volatility when the actual tapering by the US Fed starts. The rupee may trade anywhere between 61.50 and 63 in the New Year,” says N S Venkatesh, chief general manager and head of treasury at IDBI Bank and chairman of Fixed Income Money Market and Derivatives Association of India.
