Indian rupee at interim halt

The Indian rupee deprecation had an interim halt with RBI back again with a measure to halt the local currencies slide v/s the US dollar. The USDINR dropped below the 59 mark at the interbank dealing in Mumbai after the measures taken by RBI where it focused on tightening rupee liquidity rather than raising benchmark repo rate.

The Central bank increased Marginal Standing Facility (MSF) rate by 200 basis points to 10.25% and capped the amount banks can borrow from overnight markets to Rs. 75,000 crore. This is aimed to suck liquidity from the system. The central bank also said that it will conduct 0pen market sales of bonds of worth Rs. 12,000 crore to further suck out liquidity from the system. This has pushed the benchmark over 8.2% from almost 7.56% before the measure taken by the bank. Earlier, India’s 10 years G-Sec yield dropped to 7.11% level due to cut in rates by the RBI, while withdraw of funds from the bond market by FII and measures taken by the government has started pushing Yields higher. In the call money market, overnight rates such as MIBOR and call rates jumped above 9% concerning liquidity in the market.

The measures taken by the RBI seems to be an interim fix while we still need to address the structural problem facing the current account front. As per recent trade data, country’s merchandise exports during June fell 4.57% YoY to $23.79 billion signaling a wider CAD number during the first quarter of FY2014 despite imports have slowed. India enjoyed a current account surplus from 2001 till 2004 and from there onwards we are facing deficit in the account. The deficit started rising faster from 2010 breaking the 2% mark and currently hovering around 5-6%. Ceteris paribus, any further rise in the CAD may drain country’s FX reserves.

Till now, India has managed to fund the big CAD by importing foreign investments to local financial markets. However, it looks un-sustainable model as we have to pay a price during uncertainty, when foreign funds move towards safer havens such as US T-bills, Gold or Cash. If the global economy is heading for a crisis like 2008, then it looks vulnerable and it should get discounted to the national currency. However, as of now, the global economy is better off despite some ease off in China and some in Europe. 

Regulation to Rupee at 60 mark

Past three days have been eventful for the Indian FX market with market regulator started punishing market participants for representing the true picture of the economy. First, RBI barred banks to carry out prop trading in currency F&O market and then SEBI raised margin requirements by 100%.

The deprecating Indian rupee displayed the status of our external sector and how vulnerable it is in a global sell off. There has been withdrawal of funds by FII from the debt market and this phenomenon is seen across high yielding emerging nations. In India, this month FII have been net sellers at the bond market after pulling out net $5.7 billion from bonds. As speculation grew, that US Fed to taper with the QE by this year end, US treasury Yield moved higher and yield differential reduced with the high yielding currencies like India, where benchmark yields have been dropping since central banks have started cutting rates.

Indian rupee has dropped below the 60 mark v/s the US dollar, at the time of writing but again resurge back owing to the global phenomenon. Countries like Indonesia have started raining interest as they hiked the benchmark rate by 50 basis point beating market expectations and any such measures will be beneficial for India where we are running a negative real interest rate.