The afterglow of Raghuram Rajan’s appointment as the Reserve Bank of India governor has helped the rupee’s value appreciate against other currencies rather substantially from the lows of just over Rs 68 to a dollar that it hit at the end of August; the big question is whether it will stay there. A look at some other factors throws a little light on possible answers. Between June and August 2013, foreign institutional investors took out some $4 billion of the money they had invested in India as the rupee’s value depreciated rapidly and sharply. In the last 10 days or so, FIIs have bought about $1 billion of Indian equities. Two other episodes on sharp rupee depreciation — 13 per cent between September and December, 2011 and 11 per cent between March and June, 2012 — were followed by FII inflows of $8 billion and $6 billion respectively, over the next three months. Worries over the very large current account deficit have been assuaged somewhat; it has narrowed from over 5 per cent of gross domestic product to about 4.8 per cent, helped by import curbs on gold and additional customs levies on some consumption. The RBI’s announcement of swaps on non-resident foreign currency deposits with banks (about $15 billion currently) has helped too; banks can convert these deposits into rupees with the central bank and swap back into dollars when deposits mature at a swap rate of 3.5 per cent, or half the current market rate.
The easing of global tensions — notably the step-back from the threat of the United States of America’s air strikes on Syria — has had positive effects on global oil prices, and by extension on India’s balance of payments. And as Larry Summers withdrew his candidacy for the chairman of the US Federal Reserve Board, fears of a ‘tapering’ of quantitative easing have also lessened; it has been US quantitative easing that has driven capital inflows into emerging markets like India and the tapering — most markets expected it to begin this month — was expected to reverse those inflows quite dramatically.
But perhaps the sighs of relief may be a little premature. For one thing, the economic fundamentals have not changed much; wholesale inflation accelerated in August, and consumer inflation moderated very marginally. Industrial activity, as measured by the index of industrial production may have gone up, but the data is very volatile and this may be taken with a large pinch of salt. Analysts argue that tapering isn’t off the table at all; the silence on the subject makes it a very real possibility yet, in spite of whoever takes charge at the Federal Reserve when Ben Bernanke steps down later this month. So all eyes will be on the RBI’s mid-quarter policy review on September 20; most observers do not expect any lowering of policy interest rates. There is precious little confidence in the markets, and that cannot overflow.