Unlike Humpty Dumpty, Rupee was not exactly sitting on a wall when it fell. However, the aftermath of the fall was somewhat similar in both cases as the ‘king’s men’ (the government) were at a loss as to how to put them back on track. Ultimately though, the Rupee has had better luck than that of Humpty Dumpty as it has managed to get timely attention from the doctor (RBI governor) which led to its gaining a lifeline.
Factors that contributed for Rupee’s Fall
Every incident occurs due to the presence of one or more factors which may directly or indirectly influence it. The story of the fall of the Rupee can also be linked to a host of elements which may not apparently look to be attributable to the fall, but has actually contributed to its drop. Let us look at some of such factors which went on to make the Rupee vulnerable:
1. Populist schemes unleashed by the government has resulted in the fiscal deficit threatening to mounting beyond the 4.9% of last year.
2. In anticipation of a rising fiscal gap, the rating agencies have downgraded India’s ratings.
3. US Federal Reserve Chairman, Ben S Bernanke, is expected to announce certain policies on September 18, 2013 at the monetary policy meeting. Along with this piece of news, the anticipation regarding the upcoming elections in Germany is expected to influence the health of the Rupee.
Factors that contributed for Rupee’s Recovery
Optimists allowed themselves a temporary sigh of relief when the new RBI governor implemented certain immediate measures with a view to arrest the fall of the currency. The Rupee staged a recovery and climbed back to Rs. 63.84 from the despairing depths of Rs. 68.80 to the dollar ($).
Whether Indians can hope to remain optimistic about the Rupee in the long run will depend on the following very pertinent factors:
1. The kind of measures Rajan and the RBI are going to take in the near future. Already the start has been made in this direction, it is to be seen whether it will be sustained.
2. Whether the Government will contemplate a much needed increase in price of subsidized diesel and will at the same time willingly reduce non-essential imports.
3. It seems that US will refrain from going on a collision course with Syria, thanks to the proposed intervention by Russia to rein in Damascus’s chemical weaponry. This has a direct bearing on the Brent crude prices which have softened after this development. India stands to gain by the stability in crude prices.
4. Curbs on gold imports by the government has already brought about a reduction in trade deficit from $17 billion around January 2013 to a shade about $12 billion in June-July 2013.
5. The basket of currencies including the Euro firmed up against the dollar and this is expected to add shine to the Indian Rupee also.
6. Fibonacci Retracement, a technical tool used to predict currency movements, foretells that the Rupee will remain stable at around the Rs. 63 mark.
Some Important points to note:
1. The present yield of 8.40% on 10 year bonds will attract FIIs to buy debt. It was primarily due to their sustained sale that the Rupee had taken a beating.
2. The global recovery has begun and the Euro zone proved this fact by recording an expansion of 0.3% in the second quarter of this year.
3. The US job market is beginning to look brighter as unemployment is down to 7.5%. Positive sentiments are emerging based on the expectation that the American economy is going to be hale and hearty once again.
Opportunities and Threats for Rupee
At this juncture what are the opportunities and threats which have emerged as a result of the rupee saga?
Well the opportunities lie in the fact that the external debt to GDP ratio stands at 22%, and this is much below the level of alarm, implying than India can raise foreign debt. A weaker rupee also implies that exports will be cheaper.
The threats which can occur at this juncture may evolve from the emotional nature of Indian market which can fluctuate excessively due to a bad or a good phase or piece of information. The spiraling subsidy bill of the petroleum sector continues to be a matter of concern.