The Rupee Makes a Comeback - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 5 October 2013
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- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
Not long ago, there was a sense that a crisis involving the rupee was taking place. USDINR began the year trading at 55. By the beginning of September, the rupee reached a new low, trading above 68 to the dollar. This represents a fall of 24% in just over 8 months. And nearly half of that fall occurred in the month of August alone.

Since reaching its lowest level in history, the rupee has been steadily recovering. Now it trades at around 62, gaining around 9% since its lows. So why has the rupee recovered so quickly? Based on its current level, the rupee is down only 13% this year. And if we adjust for inflation differentials, the real depreciated of the rupee has been around 7%. This is significant, but certainly not a crisis.

When the rupee was reaching its lows, the mainstream view was that the country's economic and political situation was causing the rupee to crash. Falling growth, stubborn inflation, and rampant corruption are the reasons the rupee was falling. This explanation sounds convincing, but does not explain why the rupee has subsequently recovered.

In the last few weeks, the rupee has recovered by 9%. Over that time, have our growth prospects improved? Has corruption declined? Has our current account deficit improved? The answer to all these questions is no. There has not been any fundamental improvement in the Indian economy over the last one month.

When analyzing the rupee, what we need to keep in mind is that the currency movement is driven primarily by foreign investors. It is not Indian investors who need to exchange dollars for rupees in order to invest in India. Instead, it is foreign investors that need to buy rupees every time they buy a stock in India, and the same investors that sell rupees every time they exit their positions.

What this means is that we should look to foreign investor sentiment to understand what is going on with the rupee. If we look closely, what we find is that the change in the rupee is driven primarily by changes in the quantitative easing policy in the US. In August, the market widely believed that the QE program would be reduced, and this led to an outflow of US dollars from India. And so the rupee collapsed at the same time.

In the last few weeks, we have learned that the QE taper is not going to take place, and instead QE will remain unchanged. And as expected, the Indian rupee has recovered strongly. Based on this analysis, it is clear that most of the rupee's movements can be explained by what foreign investors are doing. And this also explains why the rupee has made a comeback in the last few weeks, despite no change in Indian economic fundamentals.

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is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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6 Responses to "The Rupee Makes a Comeback"

hoshang dehnugara

Oct 7, 2013

the views expressed are correct, but other things are also responsible like R B I governor immediately taking few steps in the matter.

Like 

Nabarun Halder

Oct 6, 2013

Things have got a bit complicated for the Dollar and Dow Jones with the budget impasse and Debt ceiling imbroglio in US.

It was a street consensus that Fed will scale back bond purchase and gradually starting tapering the QE. Its likely Bernanke, knowing about the twin troubles of budget and debt ceiling looming on the horizon, kept the taper on hold.

It will be interesting to see what emerges by the middle of the month when the US monetary tap runs dry. The decision of the Congress will decide the direction Dollar and Dow will take till the next scare.

As rightly pointed out in the article, Indian Rupees will track the risk on / risk off flow of funds globally.

Like (1)

praveen

Oct 6, 2013

Absolutely fantastic article. Thank you so much. Look forward to read such articles in future too.. Thanks again...

Like (1)

LOVEPAREEK

Oct 6, 2013

A VERY LOGICAL AND STRAIGHT-TO-THE-POINT EXPLANATION.

Like (1)

Sivaprakasam P.

Oct 6, 2013

Interesting
&
Informative.
Pls write an
article on
how to avoid
our currency
being taken
hostage by
foreign
gamblers
(FIIs). We
need FDI,
not FII. Who
is going to
benefit of
thìs
gambler's
forex?

Like (1)

VIKAS SIVARAMAN

Oct 6, 2013

I've heard that the Rupee collapsed because our politicians are bringing back all the money that had stashed abroad - mostly in Swiss accounts, Mauritius and Isle of Mann- for using towards buying seats and buying votes and manipulating political equations. Now that most of the money has come in the Rupee has regained some of its value. But since a lot more money is yet to come in the Rupee will remain depressed perhaps till after elections or till whenever the cost of political equations has been fully factored in.
Judging from the extent of the damage caused to the rupee you can well imagine the extent of funds that various politicians and parties have stashed outside the country. Do we really want to suit around and do nothing about th

Like (1)
  
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