The rupee snapped a three-day losing streak, spurred by the news that the US Federal Reserve will not likely raise interest rates till mid-2015, reversing days of sell-offs that had spooked emerging market currencies in the last few days.
The rupee rebounded by 50 paise to close at 63.11 to a dollar on Thursday as markets across Asia cheered US Federal Reserve’s statement that it would take a “patient” approach in deciding when to raise interest rates.
There was widespread anticipation that Fed chairperson Janet Yellen would announce a calendar to raise interest rates form the middle of next year, the first time in eight years, as data showed that the world’s largest economy was showing strong signs of revival.
An interest rate hike in the US would have likely prompted foreign funds to move out of emerging markets such as India. The resultant dollar outflow could have weakened the rupee further.
Besides, a falling rupee would have also made the Reserve Bank of India hesitant to cut interest rates to maintain India’s attractiveness among foreign funds.
“I think the outlook for the rupee now (after the Fed move) is positive. There are minor disturbances and the current account deficit (CAD) has been rising on account of non-oil imports, but it is still within the comfort level,” said Soumya Kanti Ghosh, chief economic adviser at SBI, India’s largest commercial bank.
Experts, however, said that rising gold imports remain a cause of concern.
“One of the important reasons driving down the domestic currency has been the deteriorating trade deficit,” said Madan Sabnavis, chief economist at Care Ratings. “The resurgence in import of gold is significant. This has in turn has led to an increase in demand for dollars by importers, causing the domestic currency to weaken further.”
Gold imports grew 571% in November to $5.6 billion from $0.83 billion in the same month of the previous fiscal. Similarly, silver imports jumped 143% to $643 million in November compared to $264 million in the same month last year.
The rupee’s rebound was also aided by a recovery in the Russia rouble on Thursday after Russian authorities launched fresh measures to halt its collapse.
Russia had raised interest rates on Tuesday to protect the currency amid falling prices of crude oil, one of its major export-earning items.
Analysts said the rouble and oil prices will be the key determinants in the rupee’s movements as these would influence allocations of sovereign wealth funds. “Since sovereign wealth funds are big in equity and debt markets, any reduction in their allocation would result in major capital outflows,” said Abheek Barua, a consultant with the Indian Council for Research on International Economic Relations.
“The market is aware that the current fall is transient but the Russian problem is worrying,” said Saugata Bhattacharya, senior vice-president and chief economist at Axis Bank.