The Value of the Indian Rupee: the recent trend

The value of Indian rupee against the US dollar has been steadily falling during the last few days. This has called into question about where the Indian rupee is heading in the near term. A number of reasons could be cited. However the real issue mentioned here while somewhat justified may not be ones either individually or collectively. First, let us look at all plausible explanations.

  1. RBI provided a special window for Indian oil companies to directly buy US dollar from them for a couple of weeks now. This stemmed the Indian rupees fall which hit a low level of 68.80 on August 28 to recover to 60.90 to a dollar recently. Now according to the finance ministry, about 30 – 40 percent of the dollar requirements of the oil importers are coming through the open market. This could have triggered the drop in the value of rupee
  2. The US just announced that their GDP growth rate is around 2.8 percent in the last quarter and the latest non-farm payroll job creation exceeded 200000. This is a signal to Dr. Ben Bernanke to start the tapering the QE3. Even though the tapering could be partial and not the entire $ 85 billion every month,  the sentiment is enough to have pushed the rupee from 61 to 63.70
  3. The consumer price index announced today to hit a high of 10.09 percent as compared to 9.84 percent last month. This could affect credit growth and put pressure on the currency
  4. The domestic macro-economic data releases were also not supportive of the rupee. The Indian trade deficit widened to 10.6 bln $ in October from $ 6.8 billion September. This will affect the projection of CAD made by the finance ministry. CAD is the difference between the payment made and received in $. For FY 12-13 it was $ 88 billion. This year the government expects it to be $ 70 billion. This may not come true.
  5. Now, the finance ministry is quite confident that the rupee will rally back because of the expected fund mobilization by banks through special window to touch $ 25 billion dollar. As of date they have received $ 17.5 billion and the window is expected to close on November 30, 2013. Mr. Mayaram is finance secretary made a statement that the speculators of rupee have been mislead and they are on wrong path shorting the Indian rupee. He said and I quote “It (rupee) is not going down, just wait I think it’s just crazy irrational sort of sentiment that is happening. I have an additional $ 20 billion to play with”

In conclusion, our foreign debt continues to increase and foreign inflow is stagnating. The merchandise deficit is very large and will continue to be so in the months to come. Technical analysis gives an immediate target of rupees at 66 to a dollar. To-day Dr. Ranjan has stated that the market fears are overstated and that at such times it makes sense to take deep breath and examine the fundamentals. He estimates that the CAD will be around $ 56 bln (compared $ 88 bln) last year. If true, this is good news and let us hope for the best.

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