Rupee turns shaky on global turmoil, renewed dollar strength

By Vinay Khattar

MUMBAI: The Indian markets are witnessing interesting action these days. The Sensex and the Nifty recently touched 28-month highs before cooling off, while the benchmark 10-year G-sec yield slipped to a 3-year low on rate cut speculation.

The rupee, which had been hovering in a 53-55 range for most part of this year, weakened to 56 – an 8 ½-month low -- on global risk aversion and renewed dollar strength.

Firstly, the global markets turned shaky after the US Federal Reserve sent out mixed and confusing signals on the fate of the QE. While Fed Chairman Bernanke reiterated his defence of the large asset purchases, he also said that the central bank could look at unwinding QEs in the coming few meetings provided economic data keeps improving.

The latest FOMC minutes too showed that a few members are favouring tapering of the QE schemes as early as June on evidence of strength in the US economy. That spooked global markets, with the US stocks pacing the fall amid fears that reversal in the Federal Reserve’s ultra-loose policy will suck out liquidity that has driven Wall Street to record highs.

A disappointing HSBC ‘flash’ Chinese manufacturing PMI, coupled with volatility in the Japanese financial markets added, to the negative international vibes. Japanese stocks, which have had a dream run in the past few months on the new government’s preference for easy money policy, slumped after the benchmark government bond yields spiked to 1.0 per cent.

So much so that the Bank of Japan (BOJ) had to step in to calm the jittery bond markets. The sudden reverberations in the Japanese markets came following timid response from the BOJ on the bond market volatility.

With the Fed starting to contemplate QE exit strategy, sending equity markets into a tizzy, the US dollar gained currency among risk-averse global investors.
The Dollar Index rose to a 3-year high. Interestingly, commodities like crude oil and gold remained more or less stable. In fact, gold advanced modestly.

Meanwhile, the rupee breached 56 for the first time since Sept. 2012, capping its longest losing streak in 3 months, before recovering to 55.50 levels. The fall in the rupee coincided with the drop in Indian shares.

A weak rupee increases the import bill and contributes to inflation, although exporters benefit from a weak local currency. A falling rupee also eats into FIIs’ gains in the domestic stocks and debt.

Going forward, the rupee will take direction from FII flows, domestic data points ( GDP, CAD, foreign trade etc), besides movement in the global markets.

(The writer is Head Research (Individual Clients), Edelweiss Financial Services)