1) Part of the oil companies’ demand for the dollar may be coming back to the forex market. The RBI had opened a special swap window with the oil marketing companies in July to support the rupee when it was on a free fall hitting life-lows daily. This arrangement had taken off daily demand for $500 million from the forex market. RBI Governor Raghuram Rajan recently indicated that this demand will have to return. The government would also not want the currency to appreciate too much now. The exports have just started recovering a bit. A sharp appreciation in the local currency would serve as a disincentive for the exporters at the present juncture. A fall in exports is something that the government cannot afford now as it will nullify most of the improvement in the current account deficit. Moreover, a slight depreciation in the rupee now will help the RBI later when the US Fed actually starts the taper. The central bank will be able to manoeuvre the exchange rate in a narrower band of say 62-65 or so. So the RBI is unlikely to step in now. And the rupee may depreciate a little more now.
2) US job growth unexpectedly accelerated in October as employers shrugged off a partial government shutdown, suggesting the economy was on firm footing and raising the prospect the Federal Reserve may soon decide to temper its bond-buying stimulus. The jitters in the Indian bond and forex market are also because of this. The dollar has gained globally because of the bullishness about the US economy. All Asian emerging currencies like Indonesian rupiah and Thai baht also fell today against the greenback.
3) Though there has been a let up in the current account deficit situation of the country, the government has not addressed the structural worries fully. For example, the finance minister has drawn a red line on the fiscal deficit. He has been reiterating it will not cross the budgeted 4.8 percent of GDP but is yet to explain how he is going to attain this. The deficit during April-September stood at Rs 4.12 lakh crore, which is 76 percent of the full-year target. Investors are worried that there are five more months to close the financial year. So the worries over the fundamentals remain. This is also impacting the investor sentiment for the rupee.
4) Another major worry is the inflation. Projections are that the inflation rates, both retail and wholesale, are likely to go up further because the unrelenting rise in food prices. Higher inflation means higher interest rates. FIIs would not want to stay invested in the Indian bond market in such a situation. They are exiting Indian debt even as they are increasing their exposure to equities. During Novermber 1-8, FIIs net bought Rs 2,958 crore of Indian shares, while they have sold Rs 2,916 crore of bonds.
5) Last but not least is the impending closure of the swap facilities opened by the RBI. There are two of them: one for the oil companies (explained earlier) and the second for banks. Banks are being offered this facility in order to encourage them to raise dollar deposits from the non-residents. As per this arrangement, the RBI is allowing the banks to swap their dollar for rupee at a cheaper rate. Both the facilities will be open until this month end. Once they close, the dollar inflow through these windows, which the RBI has said is $12 billion as of 25 October, will stop.
2) US job growth unexpectedly accelerated in October as employers shrugged off a partial government shutdown, suggesting the economy was on firm footing and raising the prospect the Federal Reserve may soon decide to temper its bond-buying stimulus. The jitters in the Indian bond and forex market are also because of this. The dollar has gained globally because of the bullishness about the US economy. All Asian emerging currencies like Indonesian rupiah and Thai baht also fell today against the greenback.
3) Though there has been a let up in the current account deficit situation of the country, the government has not addressed the structural worries fully. For example, the finance minister has drawn a red line on the fiscal deficit. He has been reiterating it will not cross the budgeted 4.8 percent of GDP but is yet to explain how he is going to attain this. The deficit during April-September stood at Rs 4.12 lakh crore, which is 76 percent of the full-year target. Investors are worried that there are five more months to close the financial year. So the worries over the fundamentals remain. This is also impacting the investor sentiment for the rupee.
4) Another major worry is the inflation. Projections are that the inflation rates, both retail and wholesale, are likely to go up further because the unrelenting rise in food prices. Higher inflation means higher interest rates. FIIs would not want to stay invested in the Indian bond market in such a situation. They are exiting Indian debt even as they are increasing their exposure to equities. During Novermber 1-8, FIIs net bought Rs 2,958 crore of Indian shares, while they have sold Rs 2,916 crore of bonds.
5) Last but not least is the impending closure of the swap facilities opened by the RBI. There are two of them: one for the oil companies (explained earlier) and the second for banks. Banks are being offered this facility in order to encourage them to raise dollar deposits from the non-residents. As per this arrangement, the RBI is allowing the banks to swap their dollar for rupee at a cheaper rate. Both the facilities will be open until this month end. Once they close, the dollar inflow through these windows, which the RBI has said is $12 billion as of 25 October, will stop.
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