Wednesday, 11 September 2013

From the worst to the best performer: Rupee to touch 60 as Raghuram Rajan reverses sentiment

From the worst to the best performer: Rupee to touch 60 as Raghuram Rajan reverses sentiment

Raghuram Rajan's measures reverse sentiment, rupee headed to touch 60

MUMBAI: The currency tide has turned in spectacular fashion. Asia's worst performer until last week, the rupee has become the world's best performer in the past five days as investor confidence has surged following a series of steps to boost inflows and the receding likelihood of a US strike on Syria.

The local currency had its best four-day rally in four decades after Reserve Bank of IndiaGovernor Raghuram Rajan moved to reverse sentiment on policymaking, introducing several measures soon after taking over last Wednesday. Liberal fund-raising rules for banks and exchange risk cover for NRI deposits are estimated to draw about $20 billion in the next few weeks.

The rupee's slump below 60 to the dollar was a "capitulation trade which clearly was overdone", according to Alok Agarwal, CFO at Reliance IndustriesBSE -0.15 %. "The rupee's reversal should take the same path — a move up to 63 against the dollar, with relief and confidence coming back and then a slower appreciation to 60 as the emerging markets steady themselves after the Fed's plans on tapering are known at next week'sFederal Open Market Committee meeting."

The rupee gained 2.2 per cent from Friday's level to 63.84 to the dollar. It's the best performer in the past five days among the 189 currencies listed on the Bloomberg table. The rupee strengthened past 64 for the first time since August 26 to as high as 63.76, Bloomberg data shows. The currency touched an all-time low of 68.84 on August 28.

"Rupee will touch 60," said Harihar Krishnamoorthy, head of treasury at FirstRand Bank. "People are digesting measures taken by both the government and the Reserve Bank of India and they are seen in a very positive light. Reducing geopolitical risks will boost sentiment and cool oil prices."

Fears of a US strike on Syria faded after Russia offered to ensure that chemical weapons would not be used, helping to push oil prices lower. Global stocks surged and currencies gained.

RBI meanwhile allowed a special swap window for FCNR(B) deposits to narrow the current account deficit, a measure of the difference between overseas spending and earnings. RBI will swap the fresh FCNR(B) dollar funds with a three-year tenor at a fixed rate of 3.5 per cent per annum.

"Everyone knows that 65 is way weaker than the rupee needs to be from a competitiveness standpoint," said Jamal Mecklai, chief executive at Mecklai Financial. "Even if India (and the global markets) are hit by another wave of tapering or whatever, I would bet that the ideal rupee will recover into a range of 58 to 64 over the next six months."

The Federal Open Market Committee meeting next week will indicate what Fed ChairmanBen Bernanke plans to do with the quantitative easing programme, which has become the lifeblood of emerging markets in the past few years.