For the last week, there was a lot of discussion on rupee appreciation, a sudden drift of the media from Yuan appreciation. This is because, if you see the trend of rupee from July 2008, till now, there was a wide swing against the greenback – from below 42 levels then, it moved up to 51/$ exactly a year ago, and now coming down to 44.2 /$, a drastic swing ever in a shorter period of time. What is triggering the appreciation of rupee and its effects in an unusual Q& A style. (This is bcos, one of our readers has asked me these questions and I have added a few more to her list)
Is the rupee appreciation because of dollar depreciation?
No, not completely. Might be a slight effect because of dollar losing its value. But rupee is not only appreciating against dollar, but against all major currencies – Euro, Pound etc.
Is there any relation between stock market performance and currency?
There is a greater relation to stock market and currency. Stock market in India moves up when there is a large amount of FII inflows. FII inflows obviously brings in lot of dollar and demand for rupee goes up , thus making the rupee appreciate. If you see the currency value in Feb – Mar 2009, it was around 52/$, and the stock market was at its lower levels. After March, the trend reversed, Indian market started attracting more foreign money and every month, the net FII inflow was greater and rupee started appreciating.
What is the reason behind this huge inflow of money ?
This is the effect of carry trade. Remember we discussed this… FII’s now borrow money from US, at a near zero interest rate and invest the money in Indian markets, which gives a wonderful spread . This is the main reason for FII’s to pump in money to India, to make quick return of investment and also to set of their losses which they made in their homeland J
Will there be any effects of Yuan appreciation on Rupee?
First of all, there is no question of Yuan appreciating significantly. As the Chinese economists say, they will accommodate.. Ok, if at all china appreciates Yuan, this will have a positive impact on Indian exports, since Chinese firms will lose price competency and India might get more exports, which will result in pulling down or slight depreciation of Rupee.
Does RBI have any role in stopping the currency appreciation?
Yes, RBI can decide the ups and downs of Rupee.
What methods can it adopt to stop currency appreciating further?
As an act to stop rupee appreciating further, RBI can start buying dollars and add it to its reserves, but it will lead to lot of other operations which it should perform as a whiplash effect.
This is how it can happen:
RBI will add more dollar to its Forex reserves, which will result in stemming the rupee appreciation and monetary flow in the market, which will move inflation to higher levels, and again to control this RBI should issue more government bonds/ MSS to absorb the excess money from the market. Amusing right…
And the question is it will pose excessive burden on the government to service those debts. And this is why RBI has not yet intervened the currency market by mopping reserves as it usually does…
How will it impact the economy?
The impact of Rupee appreciation in the economy will be quiet balanced. On one hand it will ease the imports, and cost of imported goods to come down as most of the payments are dollar denominated. But this will have a big impact on export oriented sectors like textiles, software etc, where in their revenue comes down when accounted in INR.
What levels will the rupee reach further? Will it go down below 40?
Voila… If I could answer this question right, I have a fair chance of replacing CFO of TCS who usually loses about hundreds of crores in Forex positions, every quarter
There is a wide spread news that, govt will direct RBI to intervene when the rupee goes below 42 levels…chances are fairly less for the rupee to go below 40.
