A late rally not­with­stand­ing, the ru­pee ended up be­ing the worst per­former among emerg­ing mar­ket cur­ren­cies this year, giv­ing up al­most a fourth of its value

The Financial Express - - FRONT PAGE - APARNA IYER

TREA­SUR­ERS had been look­ing for­ward to a fairly peace­ful 2013, but, in the end, it turned out to be a more tu­mul­tuous time than any­one had imag­ined. To be sure, they hadn’t ex­pected ei­ther the bond or cur­rency mar­kets to re­ally be­have them­selves, but nei­ther had they an­tic­i­pated the kind of dam­age that both saw through the year.

In­deed, 2013 was a har­row­ing year as they stayed glued to their screens, track­ing the tra­jec­tory of the ru­pee, try­ing to pre­dict the course of the cur­rency, but get­ting it wrong more of­ten than not. Deal­ing rooms, they re­call, hadn’t seen so much ac­tion in a decade—cer­tainly not the kind of roller-coaster ride the ru­pee took — when even tak­ing a tea-break dur­ing trad­ing hours was a risk.

Ul­ti­mately, the cur­rency made his­tory as the ru­pee fell to its low­est lev­els in late Au­gust — much of it thanks to the strength of the dol­lar, the rest the work of spec­u­la­tors. The In­dian cur­rency, how­ever, stopped short of the 70 mark many cur­rency watch­ers feared it would hit against the green­back. But, by then, much of the dam­age had been done; im­porters who hadn’t bought their dol­lars were in deep trou­ble as were cor­po­rates with an un­hedged ex­po­sure to for­eign cur­rency loans.

In­deed, so lit­tle was the faith left in the strength of the cur­rency that few ex­pected it would ever rally again. But rally it did, mak­ing a stun­ning come­back by the end of the year, gain­ing 11% from the low of 68.85 af­ter the Re­serve Bank of In­dia (RBI) swung into ac­tion with a host of mea­sures that bol­stered In­dia’s re­serves by $34 bil­lion from in­flows of for­eign cur­rency de­posits.

The late rally not­with­stand­ing, the ru­pee ended up be­ing the worst per­for mer among emerg­ing mar­ket cur­ren­cies last year, giv­ing up al­most a fourth of its value and push­ing In­dia into the club of the ‘Frag­ile Five’; the Brazil- ian real was close be­hind, hav­ing lost about a fifth of its value. And while the cen­tral bank’s mea­sures did pay off, the In­dian cur­rency might not have had the kind of safe land­ing it did had fears of the ta­per by the US Fed­eral Re­serve not eased by the end of the year.

Trea­sur­ers re­call how the fall be­gan when talk of the ta­per­ing first sur­faced in midMay and US Fed­eral Re­serve chief Ben Ber­nanke in­di­cated that the quan­ti­ta­tive eas­ing pro­gramme — $85 bil­lion a month at the time — might be re­duced. They re­mem­ber how tur­bu­lent the mar­kets were in May, June and July, how se­verely the cur­rency was jolted, plum­met­ing 23% be­tween May and Au­gust as yields on the US trea­sury bench­mark rose a 100 ba­sis points.

July was the month when the cen­tral bank de­cided it was time to act and deal­ing rooms braced for tough mea­sures. Banks were banned from tak­ing pro­pri­etary po­si­tions in ru- pee fu­tures and open po­si­tions were cur­tailed.

Im­ports of gold were tight­ened and, in a move aimed at keep­ing liq­uid­ity in check, banks were al­lowed to bor­row just 0.5% of de­posits from the Re­serve Bank.

The cen­tral bank had tried to make life eas­ier for for­eign in­sti­tu­tional in­vestors (FII) by sim­pli­fy­ing the sys­tems. But once yields on US trea­suries soared, there was no stop­ping them; in a mat­ter of months, $12 bil­lion was gone.

The out­flows weren’t just re­stricted to the bond mar­kets — eq­uity in­flows that had been clock­ing $2-3 bil­lion a month dwin­dled to just $200 mil­lion in June. July and Au­gust saw some $2.2 bil­lion move out and, on Au­gust 28, the ru­pee hit a his­toric low, clos­ing the ses­sion at 68.85.

In­ter­est­ingly, the un­hinged ex­pec­ta­tions on the move­ment of the cur­rency were re­flected both on­shore and off­shore. The ru­pee's 9% fall be­tween May and July, and rel­a­tively easy ac­cess to liq­uid­ity in the home mar­ket, saw spec­u­la­tors get­ting into ac­tion in the home mar­ket. In fact, the RBI raised the Mar­ginal Stand­ing Fa­cil­ity rate by 200 ba­sis points to 10.25% in a move to tighten liq­uid­ity.

How­ever, the trend in the non-de­liv­er­able for­wards (NDF) mar­ket was bear­ish; this ru­pee-dol­lar mar­ket has grown a fair bit over the last five years with vol­umes over­tak­ing those on­shore. Away from the Re­serve Bank’s at­ten­tion, the NDF mar­ket, deal­ers point out, was a good hunt­ing ground for any­one want­ing to punt on the ru­pee; when the ru­pee weak­ened to 60 lev­els in July, rates in the NDF mar­ket were al­ready re­flect­ing a fall to 68 in a month.

How­ever, the cen­tral bank’s move to pull the ‘oil de­mand’ — the dol­lars that oil mar­ket­ing com­pa­nies buy to pay for pur­chases of crude oil — out of the cur­rency mar­ket and al­low OMCs to ac­cess a spe­cial dol­lar win­dow did buoy the sen­ti­ment since it meant the de­mand for dol­lars would drop by a good $10 bil­lion ev­ery month.

A change of guard at the RBI in early Septem­ber when Raghu­ram Ra­jan took over as gover nor also made a dif­fer­ence; banks were al­lowed to tap for­eign cur­rency non-res­i­dent de­posits at an at­trac­tive swap rate.

Later in the month, the cen­tral bank al­lowed for­eign in­sti­tu­tional in­vestors to buy gilts on tap rather than just ‘lim­its’ that needed to be con­verted into pur­chases of bonds. Deal­ers were taken aback when, in the sec­ond week of Novem­ber, Raghu­ram Ra­jan an­nounced the ‘oil de­mand’ had re­tur ned to the mar­ket for al­most a month, some­thing the mar­ket hadn’t even got wind of.

What put short-sell­ers on the back foot was his will­ing­ness to set­tle dol­lar de­mands of oil mar­ket­ing com­pa­nies in ru­pees. With FIIs fi­nally back in the mar­ket in De­cem­ber, it was clear the tac­tics had worked; it was go­ing to be a merry Christ­mas af­ter all.


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