Expert Zone

Straight from the Specialists

When will the rupee stabilize?

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

The rupee hit a series of record lows in August, rattling the stock market and forcing policymakers to step in. But the fall was necessary to correct India’s past mistakes and improve the dynamics of the economy. Stock markets were jolted because the rupee’s slide was sudden. But then that is how markets behave.

International markets, be it for currencies or commodities, are sensitive and therefore volatile due to underlying speculation that is difficult to control. Eventually, however, a stable point is reached at which point they settle down.

It was principally the currencies of emerging market economies that weakened. The declared intention of the U.S. Federal Reserve to taper quantitative easing (QE) created a scare that dollars would be in short supply. Most currencies in Asia, for instance, depreciated except the Philippine peso. The depreciation of currencies varied depending on the country’s internal strength and weakness.

The Brazilian real was the hardest hit with a drop of more than 16 percent in three months. The rupee was a close second, followed by the Indonesian rupiah. These currencies were already under some stress. Inflation was high in Brazil and India. Growth had dropped significantly. Investment, both domestic and foreign, had also slowed.

Will the rupee fall further?

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

On May 31, the rupee fell to an 11-month low of 56.51 to the dollar. It wasn’t the only currency to suffer a loss. Most currencies depreciated during the month; some more than the others.

The appreciation of the dollar reflects an improvement in the performance of the U.S. economy and partly the related possibility of the phasing out of quantitative easing (QE) by the U.S. Federal Reserve. The latter would make the dollar even scarcer.

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