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Five reasons why rupee is depreciating despite strongFII flowsMay 24, 2013, 10.08AM IST

Tags:

US Federal reserve| US dollar| Rupee|

investments| Inflation| Indian rupee| indian economy| Government Of India| Gold| global economy| forex| fiscal deficit| Federal Reserve| European Central Bank| equities| economy| CAD| balance of payments

(The record setting performance)

By Abhishek Goenka

NEW DELHI: The rupee has plunged by around 2% in just a week. Ironically, during the same period,

markets saw inflows of up to $2.4 billion. This brings us to the riddle what is driving the rupee lower to

nearly its 8 1/2-month low?
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Also, going forward, it appears that the losses will extend. In the absence of any major news from the

domestic markets, international forces will likely drive the path of the rupee.

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Best Deals. Quick, Easy & Free!Quikr.com/Coins-NotesLet's have a look at the five major reasons behind the rupee's weakness:

Dollar On A Horse Ride

The main reason causing the rupee to fall is the immense strength of the Dollar Index, which has touched

its three-year high level of 84.30. The record setting performance of US equities and the improvement in

the labor market has made Americans more optimistic about the outlook for the US economy, thereby

spurring greater hopes of QE tapering.

The US dollar is looking like gold these days because the Federal Reserve is in a very different position

versus the ECB, BoJ and the RBA. The Federal Reserve is talking about tapering asset purchases at a

time when European officials are considering more aggressive monetary easing measures such asnegative deposit rates.

The fact that the Euro zone is in a recession is just another reason why investors are snapping up dollars.

The monetary policies of the ECB and the BoJ pose a threat to the value of the EUR and JPY whereas

the next move by the Fed should support the dollar. This divergence is bringing the dollar more into the

limelight as a 'safe haven'. Capital preservation is just as important as capital appreciation in the present

times and for this reason the direction of the monetary policy and the consequent implications for the

currency has become very important.

Recession in the Euro Zone Is Back On the Table

The rupee is also feeling the pinch of the recession in the Euro zone. The euro, which was seen holding

the key level of 1.30, has dropped lower to 1.28 levels on the back of deterioration in the local economicdata. For the past month, investors have been selling Euros and buying dollars on the premise that the

Euro zone is in a recession; and the ECB is considering more stimulus at a time when the Fed is

considering less. If the data shows a deeper contraction in Europe and Mr. Draghi reminds investors that

the Central bank is watching the economic data carefully to see if additional action is necessary, the

EUR/USD could extend its losses.

Owing to the uncertainty prevailing in Europe and the slump in the international markets, investors prefer

to stay away from risky investments. The credit rating agency's downgrade of India to BBB- with a

negative outlook the last of the investment grade has not helped its cause. Any outward flow of

currency or a decrease in investments will put a downward pressure on the rupee exchange rate. This

global uncertainty has adversely impacted the domestic factors and could lead to a further depreciation of

the rupee.

Bleak Fundamental Outlook

The country with high exports will be happier with a depreciating currency; the same does not apply for

India. India, on the other hand, does not enjoy this luxury, mainly because of increasing demand for oil,

which constitutes a major portion of its import basket. The fall of the oil price to US$90/barrel has helped

India to fight the depreciating rupee up to some extent but at the same time the Euro zone, one of India's

major trading partners is under a severe economic crisis. This has significantly impacted Indian exports
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because of reduced demand. Thus India continues to record a current account deficit of around 4.3%,

depleting its Forex reserves in the bargain and thus depreciating the rupee.

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From time to time, the macro-economic policy has to accord greater emphasis to one segment or the

other. At the present time the worry lines are multiple high consumer price inflation, a large fiscal

deficit, poor growth, flat industrial production and a balance of payments current account deficit.

No Balance at Balance Of Payments

The Government of India was relaxed with respect to the CAD issue as there was a sharp fall in the

commodity prices (of gold and crude oil). A large part of the import bill is driven by other resources as

well. The facts show that fertilizer imports surged by 30% in the last two years and coal imports have

doubled. Therefore, the problem of CAD continues to persist.

The Indian economy needs to debug its structural reforms and the gap between the imports and exports.

With the reduction in exports and an increase in imports, on one side the current account deficit has

increased while on the other, the fiscal deficit is also expected to be above the comfort levels due to

increased subsidy. A slowdown in the global economy has adversely reduced the demand for Indian

goods. The falling commodity prices on the other hand have increased imports resulting in an imbalance

between payments and receipts.

Technically Speaking

We note a recent interesting inverse 'Head & Shoulder' pattern on the USDINR chart where the prices are

close to the neckline of 55.40 and were seen facing resistance. In case this pattern holds true and the

prices break above 55.40 on a consistent note (say for two weeks), then we might see a wild move in the

Indian rupee going forward and we can easily target 57-58 levels. Even psychologically, the levels of 55

are seen as important. The breakout above these levels has triggered stop losses making the investors

cover their long positions resulting in further increasing the demand for the dollar.

(The writer is Founder & CEO, India Forex Advisors. The views expressed are his own and do not

represent those of Economictimes.com)
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Rupee's journey since Independence: Down by 65times against dollar

Aug 24, 2013, 01.54PM IST

Tags:

US Federal reserve| united states| stocks| Rupee| P Chidambaram| markets| Inflation| Independence| Finance minister| Federal Reserve| equities| economy

(The rupee depreciation)

SMC Capital

The Indian rupee, which was on a par with the American currency at the time of Independence in 1947,

has depreciated by a little more than 65 times against the greenback in the past 66 years.

The rupee touched its historic record low of below 65 (intraday) against the dollar last week on sluggish

local stocks and continued dollar demand from importers.

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The currency has witnessed huge volatility in the past two years. This volatility became severe in the pastthree months affecting major macro-economic data, including growth, inflation, trade and investment.

Managing volatility in the currency markets has become a big challenge for policymakers. Despite of a

series of measures taken by the central bank as well as the government to curb the volatility in the

markets, the rupee continues to depreciate.

The trend is unlikely to reverse any time soon.
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This rupee depreciation is badly hurting the Indian economy. It is fuelling inflation and has hurt economic

growth.

JOURNEY SINCE INDEPENDENCE

The Indian currency has witnessed a slippery journey since Independence. Many geopolitical and

economic developments have affected its movement in the last 66 years.

When India got freedom on August 15, 1947, the value of the rupee was on a par with the American

dollar. There were no foreign borrowings on India's balance sheet.

To finance welfare and development activities, especially with the introduction of the Five-Year Plan in

1951, the government started external borrowings. This required the devaluation of the rupee.

After independence, India had chosen to adopt a fixed rate currency regime. The rupee was pegged at

4.79 against a dollar between 1948 and 1966.

Two consecutive wars, one with China in 1962 and another one with Pakistan in 1965; resulted in a huge

deficit on India's budget, forcing the government to devalue the currency to 7.57 against the dollar.

The rupee's link with the British currency was broken in 1971 and it was linked directly to the US dollar.

In 1975, value of the Indian rupee was pegged at 8.39 against a dollar.

In 1985, it was further devalued to 12 against a dollar.

In 1991, India faced a serious balance of payment crisis and was forced to sharply devalue its currency.

The country was in the grip of high inflation, low growth and the foreign reserves were not even worth to

meet three weeks of imports. Under these situations, the currency was devalued to 17.90 against a dollar.

1993 was very important. This year currency was let free to flow with the market sentiments. The

exchange rate was freed to be determined by the market, with provisions of intervention by the central

bank under the situation of extreme volatility. This year, the currency was devalued to 31.37 against a

dollar. The rupee traded in the range of 40-50 between 2000 and 2010.

It was mostly at around 45 against a dollar. It touched a high of 39 in 2007.

The Indian currency has gradually depreciated since the global 2008 economic crisis.

Liberalising the currency regime led to a sharp jump in foreign investment inflows and boosted the

economic growth

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6/36

In the week gone by, the Indian rupee extended falls to a new low of 65.50 to the dollar as heavy demand

from importers along with weak domestic equities continued to weigh on sentiment.

Weakness was also seen after Federal Reserve minutes hinted that the United States was on course to

begin tapering stimulus as early as next month.

Moreover, continuing its slide, the rupee also made all time low against British pound and breached the

102-mark on local bourses.

With this, British pound has become the first major foreign currency to cross 100 levels against rupee.

However, steps taken by the RBI and the government to curb volatility in the exchange rate have had little

effect so far.

The government is now exploring structural measures to narrow the current account deficit, Finance

Minister P Chidambaram said, adding that there is no plan to introduce capital controls.

Standard Chartered cuts rupee forecast to 60.5/dollarfor end of yearECONOMICTIMES.COM Jun 24, 2013, 12.42PM IST

Tags:

US dollar| standard chartered| Rupee

(Standard Chartered cut)

MUMBAI: TheStandard Charteredis of the view that the fall inrupeeagainst theUS dollaris not done

yet and some more downside is in the offing. It expects the rupee to breach the resistance of 60 per dollar

mark and fall 60.5 per dollar by the year-end.

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Aviva i-Life Term PlanPay Only Rs.16*/day and Get 1 Crore Life Cover+Tax Benefits. Buy Now!www.avivaindia.com/Term-PlanAccording to the brokerage, until now Indian equities experienced modest outflows, supported by broadly

improving fundamentals. But rupee losses pose significant downside risks to positive economic trends

and in turn, portfolio flows. India's unstable politics and slow pace of reforms add to the downside risks.

"We expect USD-INR to extend gains in the near future and revise our forecasts higher. Central to this

view are (1) continued US dollar (USD) strength on the back of Fed tapering expectations, (2) the risk of

persistent outflows from Indian markets, which is likely to overshadow the initial improvement in trade

deficit expected in Q3, and (3) a low probability of strong policy measures to stem Indian rupee (INR)

losses," the report said.

The brokerage has maintained short-term FX rating of neutral on the rupee and lowered its medium-term

rating to neutral from overweight.

"USD-INR gains should partially retrace in late Q3, once Fed tapering is priced in, EM rallies broadly and

the INR's carry characteristics come back into play. But lingering election risks are likely to prevail,

heading into 2014. We now forecast USD-INR to be at 60.5 by the year-end," the report said.

StanChart recommends Indian importers to maintain high short-term FX hedge ratios on USD payables.

Real-money funds are advised to stay neutral on the rupee relative to benchmark, as forwards already

reflect most of the price risk.

"This puts the onus on policy makers to boost capital inflows and provide support to the INR. While

measures like lower net overnight open position limits (NOOPL) for banks may provide short-term relief,

quicker policy reforms are needed to substantially ease upside pressure on USD-INR. This is unlikely

ahead of the 2014 general elections," the report added.

At 12:00 pm, the partially convertible rupee was at 59.75 per dollar, down 48 paise, against its previous

close.

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Rupee hits 65.56/$: Will it head towards 70, or recover?ECONOMICTIMES.COM Aug 23, 2013, 01.05AM IST

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US dollar| Touch| Sanjay Dutt| Rupee| interest rate| Indian rupee|

Indian currency| forex| foreign capital| economy| dollar| Deutsche Bank| DBS| Credit Agricole| CLSA

(UBS and Deutsche Bank say)

UBS and Deutsche Bank say the Indian currency will fall to 70 against the US dollar, while Nomura does

not rule out the possibility.Experts say it were the talks of the US withdrawing the $83-billion bond-buying program that have been

weighing on the currency. With no clarity on the easing of the QE, the uncertainty persists.

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Here's what experts have to say on what is affecting the currency, what the government and the RBI

should do to stem its slide, and where the currency is seen against the dollar in the days to come.

Enzio von Pfeil, senior advisor at MCL Assets

"I think emerging market currencies will continue to plunge, particularly the Indian rupee, because of the

stronger US bond yields, making yields much more attractive ... Once the traders of the big banks decide

to go long on the emerging markets then you'll find these currencies going through the roof because they

are very thinly traded. Anybody taking a six-month view, they should be buying into emerging market

currency weakness as opposed to selling into weakness."
http://economictimes.indiatimes.com/topic/US-dollarhttp://economictimes.indiatimes.com/topic/US-dollarhttp://economictimes.indiatimes.com/topic/Touchhttp://economictimes.indiatimes.com/topic/Touchhttp://economictimes.indiatimes.com/topic/Sanjay-Dutthttp://economictimes.indiatimes.com/topic/Sanjay-Dutthttp://economictimes.indiatimes.com/topic/Rupeehttp://economictimes.indiatimes.com/topic/Rupeehttp://economictimes.indiatimes.com/topic/interest-ratehttp://economictimes.indiatimes.com/topic/interest-ratehttp://economictimes.indiatimes.com/topic/Indian-rupeehttp://economictimes.indiatimes.com/topic/Indian-rupeehttp://economictimes.indiatimes.com/topic/Indian-currencyhttp://economictimes.indiatimes.com/topic/Indian-currencyhttp://economictimes.indiatimes.com/topic/forexhttp://economictimes.indiatimes.com/topic/forexhttp://economictimes.indiatimes.com/topic/foreign-capitalhttp://economictimes.indiatimes.com/topic/foreign-capitalhttp://economictimes.indiatimes.com/topic/economyhttp://economictimes.indiatimes.com/topic/economyhttp://economictimes.indiatimes.com/topic/dollarhttp://economictimes.indiatimes.com/topic/dollarhttp://economictimes.indiatimes.com/topic/Deutsche-Bankhttp://economictimes.indiatimes.com/topic/Deutsche-Bankhttp://economictimes.indiatimes.com/topic/DBShttp://economictimes.indiatimes.com/topic/DBShttp://economictimes.indiatimes.com/topic/Credit-Agricolehttp://economictimes.indiatimes.com/topic/Credit-Agricolehttp://economictimes.indiatimes.com/topic/CLSAhttp://economictimes.indiatimes.com/topic/CLSAhttp://www.googleadservices.com/pagead/aclk?sa=L&ai=Cf8A3NWEcUsebK-XRmQWXYNmSlY8E6aXO5WDAjbcBEAEggf-BISgCUI7Gv4AHYOWCgIDcDqABr9Tz5QPIAQGpAtDbf64Ga1A-qAMBqgThAU_Q9h3zLhY8Q_ZQ0-lPKRCfF-thz2SKyt-Dho6LEKeWbwzeDBhyuG5IGSXdLWMqsQjjsHkN3JNJLGxq29Ismnkf3MVOOPfTKpZ079vb9zGRDlg5dOiz1SpEusOiCAwigFN4SWkwYPJ4Rcrj7_QLTRY2hc6uObEY06-udb5uWz9-zJscZCtOtzAcAqQK9qe5lZ-Sg17clmYAmNsodMxaWwa8zITMycNJJbK_uI5aDfIplNzti3UjkVG99goXz9tQYiLcZf0jEXn2CjUr36INJDf2KAWO4-acpg38I6T8igKwEogGAYAHuauMGg&num=1&cid=5GgMvgRRnrEy-XviCAzJNT0y&sig=AOD64_3NmtpYTqkF3h1vvBwURAa4pvun0Q&client=ca-pub-3198794349084862&adurl=http://www.policybazaar.com/life-insurance/pension_landingpage_plan23.aspx%3Futm_source%3Dgoogle%26utm_medium%3Dppc_content%26utm_term%3DSbi%2520investment%2520plans%26utm_campaign%3Dpb_pensionhttp://www.googleadservices.com/pagead/aclk?sa=L&ai=Cf8A3NWEcUsebK-XRmQWXYNmSlY8E6aXO5WDAjbcBEAEggf-BISgCUI7Gv4AHYOWCgIDcDqABr9Tz5QPIAQGpAtDbf64Ga1A-qAMBqgThAU_Q9h3zLhY8Q_ZQ0-lPKRCfF-thz2SKyt-Dho6LEKeWbwzeDBhyuG5IGSXdLWMqsQjjsHkN3JNJLGxq29Ismnkf3MVOOPfTKpZ079vb9zGRDlg5dOiz1SpEusOiCAwigFN4SWkwYPJ4Rcrj7_QLTRY2hc6uObEY06-udb5uWz9-zJscZCtOtzAcAqQK9qe5lZ-Sg17clmYAmNsodMxaWwa8zITMycNJJbK_uI5aDfIplNzti3UjkVG99goXz9tQYiLcZf0jEXn2CjUr36INJDf2KAWO4-acpg38I6T8igKwEogGAYAHuauMGg&num=1&cid=5GgMvgRRnrEy-XviCAzJNT0y&sig=AOD64_3NmtpYTqkF3h1vvBwURAa4pvun0Q&client=ca-pub-3198794349084862&adurl=http://www.policybazaar.com/life-insurance/pension_landingpage_plan23.aspx%3Futm_source%3Dgoogle%26utm_medium%3Dppc_content%26utm_term%3DSbi%2520investment%2520plans%26utm_campaign%3Dpb_pensionhttp://www.googleadservices.com/pagead/aclk?sa=L&ai=Cf8A3NWEcUsebK-XRmQWXYNmSlY8E6aXO5WDAjbcBEAEggf-BISgCUI7Gv4AHYOWCgIDcDqABr9Tz5QPIAQGpAtDbf64Ga1A-qAMBqgThAU_Q9h3zLhY8Q_ZQ0-lPKRCfF-thz2SKyt-Dho6LEKeWbwzeDBhyuG5IGSXdLWMqsQjjsHkN3JNJLGxq29Ismnkf3MVOOPfTKpZ079vb9zGRDlg5dOiz1SpEusOiCAwigFN4SWkwYPJ4Rcrj7_QLTRY2hc6uObEY06-udb5uWz9-zJscZCtOtzAcAqQK9qe5lZ-Sg17clmYAmNsodMxaWwa8zITMycNJJbK_uI5aDfIplNzti3UjkVG99goXz9tQYiLcZf0jEXn2CjUr36INJDf2KAWO4-acpg38I6T8igKwEogGAYAHuauMGg&num=1&cid=5GgMvgRRnrEy-XviCAzJNT0y&sig=AOD64_3NmtpYTqkF3h1vvBwURAa4pvun0Q&client=ca-pub-3198794349084862&adurl=http://www.policybazaar.com/life-insurance/pension_landingpage_plan23.aspx%3Futm_source%3Dgoogle%26utm_medium%3Dppc_content%26utm_term%3DSbi%2520investment%2520plans%26utm_campaign%3Dpb_pensionhttp://www.googleadservices.com/pagead/aclk?sa=L&ai=Cf8A3NWEcUsebK-XRmQWXYNmSlY8E6aXO5WDAjbcBEAEggf-BISgCUI7Gv4AHYOWCgIDcDqABr9Tz5QPIAQGpAtDbf64Ga1A-qAMBqgThAU_Q9h3zLhY8Q_ZQ0-lPKRCfF-thz2SKyt-Dho6LEKeWbwzeDBhyuG5IGSXdLWMqsQjjsHkN3JNJLGxq29Ismnkf3MVOOPfTKpZ079vb9zGRDlg5dOiz1SpEusOiCAwigFN4SWkwYPJ4Rcrj7_QLTRY2hc6uObEY06-udb5uWz9-zJscZCtOtzAcAqQK9qe5lZ-Sg17clmYAmNsodMxaWwa8zITMycNJJbK_uI5aDfIplNzti3UjkVG99goXz9tQYiLcZf0jEXn2CjUr36INJDf2KAWO4-acpg38I6T8igKwEogGAYAHuauMGg&num=1&cid=5GgMvgRRnrEy-XviCAzJNT0y&sig=AOD64_3NmtpYTqkF3h1vvBwURAa4pvun0Q&client=ca-pub-3198794349084862&adurl=http://www.policybazaar.com/life-insurance/pension_landingpage_plan23.aspx%3Futm_source%3Dgoogle%26utm_medium%3Dppc_content%26utm_term%3DSbi%2520investment%2520plans%26utm_campaign%3Dpb_pensionhttp://www.googleadservices.com/pagead/aclk?sa=L&ai=CJy1vNWEcUsebK-XRmQWXYIeL87sD74yw4WLAjbcBEAIggf-BISgCUO-cxdr8_____wFg5YKAgNwOoAGX7qHsA8gBAakC0Nt_rgZrUD6oAwGqBOQBT9C2MeApFj9D9lDT6U8pEJ8X62HPZIrK34OGjosQp5ZvDN4MGHK4bkgZJd0tYyqxCOOweQ3ck0ksbGrb0iyaeR_cxU4499MqlnTv29v3MZEOWDl06LPVKkS6w6IIDCKAU3hJaTBg8nhFyuPv9AtNFjaFzq45sRjTr651vm5bP37MmxxkK063MBwCpAr2p7mVn5K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es.com/topic/Indian-rupeehttp://economictimes.indiatimes.com/topic/interest-ratehttp://economictimes.indiatimes.com/topic/Rupeehttp://economictimes.indiatimes.com/topic/Sanjay-Dutthttp://economictimes.indiatimes.com/topic/Touchhttp://economictimes.indiatimes.com/topic/US-dollar


9/36

Credit Agricole

Credit Agricole says it does not see value in the rupee below 70 to a dollar unless foreign capital returns

and that it would not recommend buying the rupee for fundamental reasons below 75 to the dollar, as

reported by Reuters.

"The only long-term solution - deep economic, political and social reforms - is unlikely ahead of the

upcoming elections and possibly for years to come," Credit Agricole said in a note dated August 21,

adding to the chorus of bearish bets on the rupee.

Subir Gokarn, former deputy governor of RBI

"The problem is structural because it is essentially stemming from the very large current deficit (CAD).

The trigger for this (rupee slide) was of course the Fed QE tapering talks, which changed the pattern of

the capital flows largely," says.

Ajay Srivastava, CEO at Dimensions Consulting

"We should talk about the rupee particularly because the remedies for the rupee and other EM currencies

are very different. We are one of the worst in terms of current account deficit; we are one of the worst in

terms of fiscal deficit. In other countries, it is more a fallout of what is happening in the global markets. Weare a sum of three situations - fiscal irresponsibility, current account situation and then of course what has

happened in the global markets. So, we are a product of three other than a product of one."

Sanjay Dutt, Quantum Securities

"On a very cheap and lighter note, the rupee is behaving like a B Group stock, as what we call in the

market, but leaving that aside is not a time for any wise crack. It is very unfortunate that we have been

caught in this entire emerging market currency sell-off, but it is something that is really beyond anyone's

control, barring some amount of action which the RBI can take. Starting July 15, the RBI has taken action.

Unfortunately, there have been flip-flops and doublespeak a lot of time. So, the markets have got

confused. The markets hate uncertainty, especially in times like these. Sanity will start to return. We are

at extreme panic zone as far as the currency is concerned."

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AV Rajwade of AV Rajwade & Co

"Economy is surely bad, but not the fundamentals. We need to remember that the correlation between the

speed of price changes in the markets and the fundamentals, there is always a major gap; the correlation

is not strong at all. In fact, fundamentals get ignored for a very long time and then once they come into

play, it has a major impact."

Nomura

"In our view, the problem is that the RBI is trying to juggle too many balls, which sends confusing signals

and damages its credibility. Interest rate defence of the exchange rate is never a costless strategy, but

policymakers are trying to achieve INR stability without sacrificing any growth. Our view remains that the

costs of an interest rate defence outweigh the benefits and this strategy will cause greater collateral

damage. The inability of authorities to tolerate lower growth shows that this strategy is not sustainable.
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10/36

Instead of targeting the currency, the policymakers need to devise a credible fiscal consolation plan,

implement structural reforms and recapitalise banks to make the financial sector more robust."

Deutsche Bank

"Fundamentally, the rupee is undervalued and has overshot its equilibrium level substantially. Under a

scenario of deep pessimism, currencies can overshoot substantially and remain so for a long time. India,

we fear, is entering such a zone. We now believe that the rupee could touch 70 to the USD in a month or

so, although we expect some revival of the currency by the end of the year as the reality of taper turns out

to be less disruptive down the road than it is now, and the current account deficit continues to decline."

CLSA

The recent break above the July 2013 highs opens the door for further weakness towards the next chart

resistance in the 67-68 area.

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5 M

artcles on rupee devaluation

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