Wednesday, 28 August 2013

News Hour: Will rupee plunge below 70?

The Asian economies have already been under stress on speculation that US Federal Reserve will sooner than later start curbing stimulus leading to money flowing out of these economies.
MUMBAI: The Indian rupee today is the worst performing currency in the world. The rupee is down more than 7.5 per cent this week and more than 13 per cent in August alone. It has plunged nearly 25 per cent in 2013. A host of negative factors have been responsible for its fall.

The latest one to spook the markets has been the geo-political concerns in the MiddleEast. There are allegations that Syria used chemical weapons on civilians. The US, UK and France are contemplating a military action against Syria, which has had negative impact on financial assets markets including currencies and equity.

The Asian economies have already been under stress on speculation that US Federal Reserve will sooner than later start curbing stimulus leading to money flowing out of these economies.

The whole of Asia and other emerging economies are in a tight spot. The Indonesian rupiah, Philippine peso, Malaysian ringgit, Thai baht have been falling every day and are now at multi-year lows.

The Indian rupee has outperformed all these currencies on the downside. It started falling on factors like record high trade deficit, lower growth and high inflation. The fact that the structural and fundamental issues in India are not getting resolved also hurt the currency.

The government measure came in too late and were not been appreciated by the market. It forced the government to come out with host of steps in all directions. The measures seen as a desperate act ahead of general elections next year are proving counterproductive.

The markets read the government's short- term measures as quick fix and band aid steps, which will not lead to long standing solution nor get immediate liquidity into the markets.

The curbing of outflows by the government sent the markets into a panic mode and since then any step or assurances from the finance ministry have been taken with a pinch of salt.

The passage of Food Security Bill in the Lok Sabha couldn't have come at more inappropriate time. The market is worried that it will further burden the government's finance. It's a play of weak fundamentals and even weaker sentiment.

The Indian equity markets are on a downward spiral. There are worries that panic may set in if FIIs start selling actively in equities as did in the debt market.

At the beginning of 2013, the commodity prices were soft and that was a positive for the economy. But the bad news comes in droves. The commodity prices turned around following optimistic economic data from the developed world.

The crude prices are trading at 18-month high, gold is at 3-month high, base metals are at multi-month highs as well.

The Europe seems to be coming out of lows, The US economic numbers have been good, China has also started re-stocking raw material, leading to higher prices in non-ferrous metals, iron ore and steel.

The Finance minister along with other major banks and brokerages have been calling the rupee as overshot and undervalued.

JPMorgan believes the rupee weakness is leading to more weakness and the fundamentals are not so weak. CLSA in a note said the most of the India's problems are self inflicted and they don't rule out more pain.


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