That the economy wasn’t going to do well in the past year or so was a fact well-known. The Eurozone problems and high commodity prices were putting pressure on inflation, interest rates and hence growth. Domestic factors, which could have helped support the economy, were also missing thanks to New Delhi’s policy paralysis.
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Thus, selling equities short was a reasonably easy trade, and that’s why it would have yielded limited returns. On the other hand, if the Indian economy was going to be under pressure, selling the rupee too was an option. That trade turned out to be much smarter than selling equities.
While the BSE Sensex in the last one year has fallen from 17,993 to 15,965 - a drop of 11 per cent, the rupee has slipped from 45.24 to 56 to the dollar, a drop of nearly 24 per cent. And if you are among the luckier ones to have money stashed up abroad and had sold the Indian market in dollars, then your gain would have been 29 per cent as the Sensex measured in dollar terms has fallen from 404 to 286.
The reason is easy to fathom on hindsight. If the economy is going to be weak, foreign investors (portfolio, direct and debt) are likely to slow down investments or exit partially, which will hurt the currency. With high global commodity prices, rising deficits and high interest rates, the impact on the rupee becomes more pronounced. Besides the macroeconomic issues, the central bank’s opening up of the forex market on futures exchanges has also made it very difficult for the central bank to intervene and control the currency.
The drop in liquidity and the lack of adequate foreign exchange reserves add to RBI’s limitations. Between November 2011 and January 2012, the central bank had pumped in nearly $18 billion (nearly Rs 90,000 crore) in both cash and derivatives markets to support the currency. Even after taking a series of measures to curb speculative flows, the central bank has been unable to stop the bloodbath.
