Table of Contents
A runaway rupee train ............................................................................................................................ 2
A runaway rupee train
Its lowest point was on Wednesday last. The rupee fell to yet another all time low of 68.75, the biggest one day fall in 20 years. Much of the recent analyses has centred on the reverse movement of short-term capital flows to the U.S. and other developed markets in the wake of a possible tapering off of quantitative easing by the Federal Reserve. As returns from the developed markets improve, the incentive to stay invested in big emerging markets such as India vanishes. The pull out by foreign institutional investors selling Indian stocks and repatriating proceeds in dollars has hit the financial markets hard through lower stock prices and lower rupee. Fears over possible military action by the U.S. in Syria have further aggravated concerns over the stability of currencies. But India was the worst affected, probably due to its higher dependence on foreign flows. The reasons Very importantly, Indias macroeconomic woes its twin deficits (current account deficit and fiscal deficit) were in focus. There is the usual month-end demand for dollars from the real economy such as for oil payments. The swap arrangements put in place by the Reserve Bank of India on Thursday have helped in changing the sentiment. The rupee gained by more than 200 paise, and the stock markets staged one of their biggest one-day rallies. Yet, their closing levels, significantly better than on Wednesday, give no room for complacency. The passage of the Food Security Bill raised concerns over the ability and willingness of the government to consolidate the fisc. In fact, the sensational drop in the rupee on Tuesday was attributed to the Food Security Bill alone. But on more considered opinion those fears are seen to be exaggerated. After all, the Bill has been in the works for more than a year and budgeted for. Its full financial implications will be felt only over the long-term. Petroleum under-recoveries, lack of traction in disinvestment/spectrum sale and question marks of revenue projections are the bigger reasons for the fiscal drag. The negative impact of the phase out of U.S. monetary policy has been spectacularly felt in almost all emerging markets. Currencies of Brazil, Indonesia, Russia, Turkey and South Africa are witnessing extreme volatility.
Indias foreign exchange reserves deplete by $1.08 billion
As per RBIs data, Indias foreign exchange (forex) reserves reduced by $1.08 billion to $277.72 billion for the week ended Aug 23, 2013. The Special Drawing Rights (SDRs)
decreased by $4.5 million to $4.38 billion for the same period. Gold reserves remained at the same level at $20.74 billion.
Factory activity of India contracts for first time since March 2009
It is for the first time in the last 4 years that Indian factory activity has registered a shrink aggravating the concerns for the countrys deepening economic woes even as the Reserve Bank of India (RBI) battles to defend the rupee currency. It came into notice from the Purchasing Managers Index (PMI) data that showed Indianeconomy grew at its slowest quarterly rate in the three months to June since the global financial crisis.
