Rupee recovering fast & will stabilise stronger as trade imbalance corrects

The rupee has staged a strong recovery after hitting the skids over the last few months. The sudden turnaround has caught some by surprise, but it shouldn't have. The rupee crashing below 60 to a dollar was a capitulation trade that was clearly overdone. Given market data and the likely trajectory of the global economy, the Indian currency could actually exceed expectations here on, regardless of the US Federal Reserve's tapering programme.

India is among the five largest economies on the basis of purchasing power parity, and is among the most open with international trade now nearly 50 per cent of GDP. Clearly, it can no longer be insulated from global market and risk developments.

Sure, economic growth hit a record low of 5 per cent in the financial year ended March 2013 and slowed to 4.4 per cent in the first quarter. But apart from China, India still has the highest growth rate among all economies with a GDP of around $2 trillion or more. Yet, it has had the worst-performing currency in its peer group since May, when talk started about the Federal Reserve tapering its bond-buying programme.

  It would appear that sentiment got the better of objective analysis. India's net equity inflows amount to $12 billion since the beginning of the calendar year, while there's been a much smaller outflow from debt investors. But we perceive a crisis of confidence among foreign institutional investors (FIIs).

  The allocations for the purchase of debt securities among FIIs were fully sold a few weeks ago. This is despite India seeing more foreign direct investment this year from consumer and pharmaceutical companies, airlines and so on than ever before, with the exception of the BP-RIL deal in 2011.

  Apart from this, Moody's reiterated the country's investment-grade rating a few days ago.



vijay kr yadav
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