The rupee has swung between two extremes over the last six months. Having cantered close to Rs. 70 to a dollar, the rupee had recovered significant lost ground, partly because of a string of measures by domestic monetary and fiscal authorities, and partly the return of a more benign international environment.
In May and June, there was heightened speculation that the US central bank would start unwinding its stimulus programme. This triggered an exit of foreign funds from countries such as India. Between June and August, foreign institutional investors (FIIs) pulled out more than Rs. 23,000 crore from Indian stocks. There was, however, a turnaround since September after the US Fed deferred a tapering with FIIs bringing in dollars worth more than Rs. 25,000 crore into Indian equities between September and October.
But just when a degree of stability appeared to have returned, the rupee has again begun to skate down. There seem to be two proximate reasons: incipient signs of a recovery in the US and a probable winding down of a special window for domestic companies to meet their dollar demand.
There are signs that the US economy is turning around, setting off a scare that the Fed Reserve will start tapering its easy money policy. This has come at a time when the Reserve Bank of India (RBI) probably could be thinking of gradually closing down the dollar window it had opened for Indian oil companies.
The RBI’s decision to allow oil companies to buy dollars through a special window and not through currency markets had reduced the demand of up to $400 million in daily spot markets aiding the rupee’s sharp recovery. Analysts reckon that the rupee could correct as and when this measure is rolled back.
There are signs that the US economy is turning around, setting off a scare that the Fed Reserve will start tapering its easy money policy. This has come at a time when the Reserve Bank of India (RBI) probably could be thinking of gradually closing down the dollar window it had opened for Indian oil companies.
The RBI’s decision to allow oil companies to buy dollars through a special window and not through currency markets had reduced the demand of up to $400 million in daily spot markets aiding the rupee’s sharp recovery. Analysts reckon that the rupee could correct as and when this measure is rolled back.
The rupee’s latest downward march could not have come at worse time for the UPA government in particular, and political parties in general — key state elections are currently on and Parliamentary elections are less than six months away. The road to recovery could be paved with short-term shocks to our economy.