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How Jupiter's Vazirani is playing the Indian rupee slide
by Avinash Vazirani on Aug 23, 2013 at 12:51
Putting rupee slide into context
While the speed of the rupee’s decline may be causing some investors concern, we believe it is important to view this downward swing in the context of summer trading volumes where smaller, single bets by traders on a currency can have a disproportionate impact in the absence of bigger, key players.
On a more positive note, RBI’s measures to boost the country’s beleaguered banking sector and lower the cost of borrowing do appear to have had some effect.
The central bank’s announcement this week that it would buy Rs80bn ($1.2bn) of long-dated government bonds did see the yield on the benchmark 10-year government bond fall back to 8.2% from an intraday high of 9.47% on Tuesday.
The political climate in the country is also doing little to boost positive sentiment towards India.
The current government is much too focused, in our view, on legislation that will help it to get re-elected, with the country due to go to the polls by the middle of next year at the latest.
Some of the more difficult structural reforms that need to be undertaken have been put to one side. Apparent disagreement meanwhile between the government and the outgoing Governor of the RBI, Duwuri Subbarao, over macro-economic policy has done little to boost confidence that there is a clear economic and monetary strategy in place to take the country forward.
It is our view that India would benefit hugely if early elections were called if only to end this period of uncertainty dominated by political electioneering.
Domestic politics may be playing its part in the rupee’s slide but US monetary policy is also having a significant impact. The US Federal Reserve’s $85bn-a-month bond buying programme unleashed a wave of cheap money that found its way into emerging markets where it could earn higher yields than in developed markets.
Since the US Federal Reserve has signalled it would be cutting back on its bond buying once the US economic recovery is on sure footing, investors have been piling out emerging markets, sending these countries’ currencies spiralling down.
In various degrees, Brazil’s real, Indonesia’s rupiah or Mexico’s peso, just like the Indian rupee have all fallen sharply against the US dollar. With the Federal Reserve still unwilling to set a date on when it will start the tapering of its quantitative easing programme, as its bond buying scheme is better known, the rupee and other emerging market currencies are likely to remain volatile.
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