Forex

Rupee ends 11% lower in 2013

Satyanarayan Iyer Mumbai | Updated on December 31, 2013

BL01RUPEE

Pace of Fed-tapering, election outcome key in 2014

The rupee ended 2013 at 61.80 against the dollar, falling almost 11 per cent in twelve months as the perpetual fear of Fed tapering and a host of domestic issues weighed.

In 2014, the pace of further tapering by the US Federal Reserve and the outcome of the general elections at home will weigh on the Indian unit.

The outgoing Chairman of the US Federal Reserve, in mid-December, initiated the long awaited winding down of the $85 billion a-month bond buying programme. While slashing it by $10 billion every month, he cautioned that the pace of further tapering will depend on sustainable recovery of the US Economy.

A loose money policy such as the US Fed’s bond buying programme pumps money into the financial system with a view to boost growth. Some of this easy money finds its way to emerging market shores like India.

As uncertainty over tapering persisted for most of the year, currency market players panicked at the slightest hint of tapering. This affected other emerging market currencies too, but the rupee was hard-hit because of the country’s high current account deficit for three-quarters of the year.

HOME CONDITIONS

A stable government at home will likely to lend itself well for the Indian unit. However, the new Cabinet that will likely take charge in mid-2014 will also face a lot of macro-economic headwinds in its first year.

It was only in the final three months of 2013, the currency seemed to respond to policy measures acting till then almost as if on free-will.

When the gold import restrictions announced by the government started to take effect, the rupee returned to a semblance of normalcy. It seemed to be getting out-of-control at one point as it touched a low of 68.80 in end August.

The RBI Governor, Raghuram Rajan, announced a series of measures on the day he assumed office to stabilise the Indian currency. One of his measures – the foreign currency exchange swap – had the desired impact. As non-residents brought in $34 billion through the special window, the currency appreciated to the 61-62 levels.

These were measures taken as an immediate response to the currency troubles. However, such measures cannot sustain for long. The restrictions on gold import will have to go at some point. The swap window has already been discontinued. What is needed is stabilisation of the country’s current account deficit through normal means. This would require substantial policy action – more by the government of the day and less by the central bank, say analysts.

>satyanarayan.iyer@thehindu.co.in

Published on December 31, 2013

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