Wednesday, August 28, 2013



Rupee is having a free fall for the last two months, but it appears that none of the steps taken by the Central Bank or the Government has yielded the necessary results. It starts with increasing the duty on import of gold, curbing gold imports, stopping of sale of gold by the Banks to the reducing the free remittance limit from USD200000 to USD 75000. Further measures like proprietary trading by the banks has not stopped the falling of rupee.


 Looking at fundamentals, India’s economy is still leaking foreign funds out of its coffers. There has been nearly USD 1 Billion worth of sales in stock market in the past 8 trading sessions. With sizable Foreign Holdings still remaining, the selling is unlikely to stop, and means continued weakness for the Rupee in the near-mid term unless RBI start to stem the tide by introducing long-term economic stimulus plans, or resort to a ban of foreign transaction altogether until the economy recovers. In the meantime, the crude oil prices us going up which will in turn increase the import bill of the government. Government policy regarding passing the oil bill to the common men has also fuelled the inflation in the indirect manner. The efforts taken by the government to reduce the current account deficit has not yielded the expected result.

It is unlikely that India will resort to that as that would mean a total cut off from global financial system, potentially even years after recovery has ended just like Malaysia did during the Asian Financial Crisis of 1997. However, if RBI/Indian Government does not do it, they will most likely need to seek IMF funding just like Thailand, Indonesia and Korea did in order to tide over. Do nothing, and we may see USD/INR continue higher in the next few months even without USD strengthening.

 

In view of the above, it is highly likely the rupee will touch a new high of 75.00 in a few weeks.