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Kishore Narne

By Kishore Narne 08-Aug-2013 | 15:31

Ever since the US Fed announced tapering of its ultra-loose monetary policy, the rupee has been in a downward spiral.

Global funds have diverted their wealth to US markets in anticipation of the strengthening of the dollar index and better yields on US treasuries, which also happens to be a safe haven. The yields over 2% on US 10-year bonds were deemed attractive and led to a drain of capital from emerging markets, which were already suffering from impending slowdown and low investor confidence.

The woes were further aggravated when China failed to beat its GDP estimate, spelling a dreadful scenario of economic slowdown and collapse in commodities prices. Historically, the US dollar and commodity prices have been inversely related, and commodities have always been perceived as risky assets.

So, when the Fed announced tapering, it was an end of cheap money and led to a selloff in most asset classes. India was supposed to be a brighter spot on the world investment map hoping to benefit from lower commodity prices but the scale has inclined in favor of India`s adversaries.

The ballooning current account deficit was the prime of all factors to puncture the Indian growth story. The record high gold imports in the month of May to the tune of 162 million tonnes hit the sentiment further.

The government responded by quadrupling import duty and restricting gold imports but failed to bolster support to a falling rupee. The fall was accelerated further when the RBI jumped into arena to curb rupee volatility.

Speculators and arbitragers sprung into action to take advantage between pricing differentials in on-shore and off-shore markets. The political debacle and turmoil in middle-east caused a surge in crude oil prices, which gained as much as 25% from current year`s low.

All said and done, most measures by the RBI to curtail the slide in the INR have not gained much traction as it continues to make new lows each day. Some intense and aggressive steps by the RBI can trigger a reversal, and all eyes are set on that. Until then the weakness in the INR could continue and the drift can take the rupee down to 63 and below levels.