Why Nervousness of Rupee's Fate Will Continue for Many Months

Rupee's rollercoaster ride continues. Down yesterday, and today first up down, up... Well, I am sure people will get the drift. Of course, the fear that the rupee will plumb the depths it had some months back is still fresh in people's minds. I have been asked a couple of times in the last two months, especially in a popular radio show, whether I expect a major turnaround in the fortunes of the rupee. My reply has always been been that it is unlikely that it will appreciate beyond Rs 60 to a dollar in the best case and in most days till March-end it will probably hover closer to Rs 60 than Rs 65. I do still believe so. As we move ahead in the remaining part of the financial year, we can expect exports to perk up as US and some European economies recover. If the gold imports remain in control as they have (the unofficial imports i.e. smuggling must be going on), this should be a decent factor helping the rupee. Inflation is unlikely to spike internally (monsoon is behind us) though it can remain stubbornly high at the current levels.That leaves us with US Fed's so-called "Tapering". It is unlikely that anything drastic will be done by Fed real soon. History teaches us that economies recovering after recession triggered off by a financial crisis take long time to recover and do so slowly. The current global financial crisis is no different. It has been six years since 2008. Median wages today in the US are what existed about four decades back and public investment is at the same level as 1947. These are not the indicators of an economy out on a hundred metre dash in the next few months raising inflation and employment levels which the Fed will be eyeing before it begins the "Tapering". Of course, that will not stop people from getting nervous about the rupee since confidence in a currency is also about the confidence in the economy it represents. One has to admit that India's fundamentals need to be fixed. A critical milestone will be the fiscal deficit figure that will be mentioned in the next Union Budget on February 28. Once the world has known that the Government has been able to meet its target (by hook or crook) and also has been able to control the external deficit, which I think it will be able to meet, people will start feeling a little less nervous about the rupee. But that's more than three months away, isn't it? Well, till then, we can expect more of the same.    

When Will Fed's Tapering Begin?

This is a trillion dollar question. When will the Federal Reserve in the US, actually start reducing the supply of cash that it has been flooding the US since the Lehman Crisis in 2008. This excess cash has, as we all know, found its way across the world and sustained economies and asset markets be it stockmarkets, commodities like gold or oil. Slowly turning the tap off, will naturally make a huge difference to a whole range of factors across the globe. In India, there would obviously be impact on stocks, value of the rupee and the overall economic growth since a lot of the high growth in the last one decade has been financed by incoming foreign funds.  A taste of what could happen if the tapering starts was visible earlier this year when the Fed chairman gave indications and our stockmarkets and currency went for a tail-spin. But since then, thanks to the US govt shutdown in October and other factors, the tapering seems to have got postponed. But then, as RBI governor Raghuram Rajan said that, "it has been postponed". Or the tapering is inevitable. So what signal is Fed looking at?

 Earlier this week I came across this article in Business Insider that gives interesting indications    (http://www.businessinsider.com/hatzius-fed-will-lower-unemployment-threshold-to-6-percent-2013-11). It seems the Fed is looking at two US economic indicators of unemployment falling to 6.5 per cent-6.0 per cent and inflation rising to 2.5 per cent. Well, while all this hardly gives you a sense of certainty but it does give you an idea of possible milestones for one of the most economic events of recent times to get kicked off.