The rupee is on a sudden dream run. The currency rose 5 percent, according to reports, in four day flat.
It hit a life-low last week and also rose to seven-week high, all in a week’s time.
Volatility is the rule of the game in the foreign exchange market. On Wednesday, the rupee moved in wide range – from 54.18 to 54.86 – against the dollar.
The sudden spurt in the rupee is in reaction to the “animal-spirit” speech given by Prime Minister Manmohan Singh after he assumed the finance ministry portfolio.
The comments have boosted sentiment across markets, as they gave rise to hopes that the government may finally get cracking on the reforms front.
The sentiment got a further fillip after the Prime Minister’s Office published guidelines for the contentious General Anti-Avoidance Rules on taxes.
All these factors are, however, fickle. Nothing concrete has come through yet from Finance Minister Manmohan Singh. The markets, which have been desperately looking for a replacement of Pranab Mukherjee, are reacting too much, as of now.
None of the measures announced until now has managed to boost the flow of capital for the long term.
Take the case of the increase in foreign investment limit in bonds. The Securities and Exchange Board of India (Sebi) on Wednesday conducted a special auction to allocate the enhanced Rs 28,496 crore limit in long-term sovereign bonds with a residual maturity of a minimum of three years, Reuters reported.
But investors’ response to the auction was minimal, on various reasons like restrictions on investment and a US holiday, which reduced the number of participants, the report said.
The tepid response points to the ineffectiveness of this policy in attracting long-term capital, if that is what the economy requires now.
The increase in debt investment limit for the foreign investors was one of the measures announced by the Reserve Bank of India as part of a much-hyped package to revive foreign investor sentiment.
All such measures are short term in nature and only adds to the volatility in the markets.
A case in point is the measures announced by the RBI in December to arrest a sharp fall in the rupee.
A report in the Economic Times says these measures are rendering hedging difficult for companies.
The central bank had barred cancellation and rebooking of forward contracts and reduced the net overnight open position limits in order to curb sharp movements of the rupee.
True, the steps helped then. But, the rupee declined further as over the months, these measures turned out to be ineffective in dealing with emerging economic challenges.
WHAT LIES AHEAD
The moot question is what lies ahead for the rupee. If the reforms measures remain sentimental and short-term, the currency will have to face more rough weather.
“…The rupee’s problem reflects large current and fiscal account deficits (fuel subsidies play a great role here) and a lack of external demand for India’s exports relative to imports,” Scotiabank said in a recent research report.
The bank expects the current account deficit only to worsen in April-June from $19.42 billion recorded in January-March as “external demand has certainly shifted lower and probably more than offset any easing in energy prices”.
Given the current account and fiscal deficit situations, a sustainable rupee appreciation is unlikely in the near term.
With the government at the centre preoccupied with the political wranglings over presidential elections, a concrete move ahead on reforms will be too much to ask for.
(curtsey : first post)
For the time being, the rupee will have to wait.
Head Research Department