US Fed hike looming; markets and investors jittery

Most market watchers consider rupee to be overvalued and blame it for hurting India's export growth. They are of the opinion that an orderly depreciation in rupee would help stem the volatility to an extent.

The sharp fall in rupee on Thursday and the days before is an ominous sign ahead of the impending rate hike by the US Federal Reserve. The domestic currency fell by 29 paise at 66.61 in Thursday's session due to sharp appreciation in the US dollar in overseas markets. The domestic currency has slipped to its lowest level since 16th September on Thursday, trading at 66.57 vs. the dollar. It fell by about 3.5 percent against the US dollar this year, and by 21 percent since May 2013.

A strong domestic stock market, where the benchmark Sensex gained about 200 points, offset the losses in rupee to an extent. However, the demand for US currency from importers and banks was too high, which eventually weighed on the domestic currency.

The rupee has been under tremendous pressure over the past two months because of a strengthening dollar and strong outflow of overseas portfolio investor money from domestic equities, leading to a spurt in dollar demand. The RBI has intervened from time to time to stem the sharp fall in rupee and reduce the overall volatility.

The US dollar index, which measures the dollar strength against a basket of eight key currencies belonging to its trade partners, has surged about 5 percent in the past month, as investors became ever more certain of a rate hike in December. The dollar index was trading above the 99 mark in the last five sessions and hit a eight-month high of 100.21.

The central bank's attempts to arrest the fall in rupee's value due to domestic political uncertainties and a strengthening US dollar drained $1.90 billion from India's Forex reserves in the first week of November alone. A steady rise in the value of the greenback and heightened fears of a US Fed rate hike have made rupee more volatile.

Most market watchers consider rupee to be overvalued and blame it for hurting India's export growth. They are of the opinion that an orderly depreciation in rupee would help stem the volatility to an extent. Market watchers are convinced that as long as the fall in rupee remains in line with the weaknesses that have surfaced in other emerging market currencies, the scenario is manageable.

Notwithstanding the above, the outlook for rupee is strong because the fundamentals of India's economy remain strong. The Government has managed to keep the current account deficit and fiscal deficit in check and the broad view on India remains positive. Despite a surge in outflow from domestic equities, there has been a decent inflow into local debt markets. This is giving some confidence to currency market traders and investors, many of which are concerned about an immediate or sharp depreciation in rupee.