8/13/2019 The Ageing Rupee

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Last week witnessed land slide in few regions & currency slide in few emerging economies

which caused mayhem among the pilgrims & investors . Here, we would like to stick with rupeeslide mainly, which has fetched itself a tag of senior citizen. A mere thoughts on the tapering of

Quantitative Easing (QE) III, a massive bond buying program worth US$ 85 bn. A month by

Federal Reserve (Fed), is responsible for the fall of some currencies & its further coupled by

weak manufacturing data from China that stood at a 9-month low.

Background: Why the markets are fed up with Fed ?

Last September, after a disappointment with US economy, Feds chairman Ben Bernanke

announced the third round of QE. Hence, with more money in hands, investors started looking

towards emerging economies like India, Brazil, South Africa etc. Meanwhile with the easy

supply of money, yields on US Treasury bonds also dropped. Since last few months US economy

has been resilient to any downtrend but its job data has shown significant improvement which

reduced from the levels of 8.2% to stood at 7.6%. As a result, Mr. Bernanke announced to begin

the tapering of the stimulus from the year-end onwards. Although, no specific date is

mentioned but speculations are rife that it would be post September when unemployment rate

would be around a comfort level of 6.5%.

Repercussions

The word tapering was sufficient to spook the markets be it developed or developing

economies, debt or equity market as it signaled investors to pullout monies from emergingmarkets. Thus, investors went on selling off equities & debt instruments. The rupee logged its

all-time low of 60.73 against a dollar. On the same day, Sensex shredded 526 points, nose-

diving by the highest single-day loss in last 2 years. It is almost 2-year single-day loss. This

would lead the prices of imports to head towards north. Gold, oil, imported cars & electronic

articles, foreign education are set to become expensive.

RUPEE DEPRECIATION:AN INSIGHT TO THE CAUSES &UPSHOTS

8/13/2019 The Ageing Rupee

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Yields on 10yr Government of India bonds also rose to 7.31%. As a result, NTPC shelved its Rs.

1000 cr. bond issue & SAIL also deferred its bond issue. Depreciated rupee would also hit hard

the finances of oil marketing companies (BPCL, HPCL, IOCL) as India imports almost 80% of its

oil requirement. WPI(wholesale price index) inflation for May was at 4.7% which may cross the

5% mark. The stubbornly-high inflation would again coerce the RBI not to lower the rates forfew more months. High Current Account Deficit(CAD) at 5% in FY13 may further increase. And

Finance Minister would also scramble to keep the Fiscal Deficit which is targeted at 4.8% of GDP

for the current fiscal.

IT sector companies were expected to gain from rupee decline as bellwethers like TCS, Infosys,

Wipro have more than 80% of their revenues from US & Europe. However, they also wont be

able to relish much as 25-35% of their receivables are hedged generally. Albeit ONGC which also

sells natural gas & earn revenues in dollars, may also see losses as its subsidy bill would swell. A

decline of Re. 1 a dollar costs losses of around Rs. 8000 crores to OMCs; oil price also increased

by $3 a barrel to $104.

The liniment

Seeing the carnage at D-street & B-street i.e. bond market, RBI has to suspend bond trading

for an hour. To sustain the rupee below 60- psychologically a crucial level, RBI & few companies

sold dollars. However at this juncture, RBI cant use this tool for too long because foreign

exchange reserves are only around $287 bn or 15.6% of GDP. Chief economic advisor Raghuram

Rajan, allaying concerns claimed that enough arsenals are there to choke the decline. As many

analysts believe this slide has got nothing to do with local fundamentals. Hence its a short-term

phenomenon & investors shouldnt panic. Structural problems exist due to which CAD & trade

deficit are high. For these, government should sell the India-story & attract more investors. As

proposed by Arvind Mayaram, economic affairs secretary, FDI caps should also be increased in

few sectors like defense & telecom in which FDI limits are 26% & 74% respectively.