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.
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