The reversal in fortunes coincides with Raghuram Rajan taking over as RBI Governor

It was September 3, 2013. The Reserve Bank of India was getting a new Governor, on whom much hopes were pinned to get back on track an economy fast going downhill and a rupee that was failing to find a bottom.

Though Rajan cautioned he had no magic wand to set right all issues in quick time, the rupee’s fortunes began changing almost overnight. And within the space of a month-and-a-half, the Indian currency vaulted from being the worst performer globally in 2013, to the best performer.

The Federal Reserve deciding to put off the tapering of its quantitative easing (QE) programme also aided this reversal.

The rupee, which had declined 17.2 per cent against the greenback during January-September, had gained 9.5 per cent by close of trade on October 15.

Among the big ticket announcements to support the rupee was a special swap facility for banks bringing in foreign currency non-resident deposits.

In tandem with this measure, the RBI doubled the overseas borrowing limit of banks.

Together, these measures attracted inflows of $5.6 billion so far and are estimated to rake in around $15 billion by the time the window closes in November.

Another key decision was to sell dollars directly to Indian oil companies, which account for a chunk of the demand for the American currency for crude imports.

These companies require $400-500 million daily and directing them to a special window eased pressure on the rupee in the forex market. The RBI last opened such a window during the 2008 global financial crisis.

The central bank also enhanced the limit for exporters to re-book cancelled forward exchange contracts to increase liquidity in the currency market.

The measures helped attract $2.1 billion in fresh foreign institutional investor (FII) inflows into the equity market and $1.2 billion in the debt segment in September. FIIs have pumped $809.4 million into equities in October so far, while pulling out $1.2 billion from the debt market.

The foreign exchange was welcome and had a stabilising effect not only on the Indian equity market but also the domestic currency.

The rupee’s sharp decline this year can be primarily attributed to the plans of the US Federal Reserve to gradually roll back its monetary stimulus measures, dubbed QE tapering.

Taper fears

When Rajan’s US counterpart Ben Bernanke had on May 22 informed the US Congress about plans to taper the QE, most global currencies tanked. The rupee, which was at a comfortable Rs 54/dollar on May 22, plummeted to a new low of Rs 68.85/dollar by August 28.

But the Federal Open Market Committee (FOMC) decision in its mid-September meeting to postpone plans to taper the stimulus helped most emerging currencies, including the Brazilian Real, South African Rand and the Russian Rouble to halt their slide and stabilise.

The rupee also benefited from the Federal Reserve’s decision.

arvind.jayaram@thehindu.co.in

(This article was published on October 15, 2013)
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