Expert Zone

Straight from the Specialists

Rupee should not harden further

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

The rupee has recovered over the past few weeks after falling to a record low of 68.85 per dollar in August. After a period of unease, the finance ministry and the Reserve Bank of India can now take it a little easy. But care needs to be taken that the rupee is not driven up further.

Speculation about the end of the U.S. Federal Reserve’s bond-buying programme in May affected global currencies and the rupee was not alone in this predicament. The announcement had created a scare about the tapering of quantitative easing. That would have dried up liquidity that the market had got used to. The Brazilian real, Indonesian rupiah, and the Indian rupee were the principal losers.

The market scare hit sensitive FII investment and the total net outflow from India between June and August was 226 billion rupees. That hit the stock and currency markets. The rupee, which was at 50-51 to the dollar in May, was near 69 in August.

The subsequent hardening of the rupee was partly due to a series of measures introduced by the RBI to curb speculation by increasing short rates and making it easier for banks to borrow dollar funds from abroad. More important was Federal Reserve Chairman Ben Bernanke’s surprise postponement of imminent QE tapering. That brought relief to the market and most currencies recovered.

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