Whither the Rupee - An occassional commentary on financial markets

  

If we could first know where we are, and whither we are tending, we could then better judge what to do, and how to do it. ..

The above statement gleaned during a random read prompted me to look at the currency markets - and some basic economic data - to understand if we are about to move into a new trend. Or it is just another fight  between various forces in administration and regulation that shams as a trend and dies down under the weight of political priorities.

The trade policy for 2009-14 doesn't provide great insight. Nor do the projections of an estimated $125 billion trade deficit. The short term relief lies in managing the deficit via the Capital account - and the success of this strategy ironically is predicated on a shun-the-developed-markets and move-to-growth-economies theme among investors. With some Fed members already clamoring for another round of expansionary policy-line, there is some hope of another global financial market crisis or a prolonged slowdown across majors. And therefore, possible surge in capital flows into India. What is not clear is how this will pan out against an inflation fighting central bank. Sequencing of policy moves could do the trick.

Moving to the main item, Rupee looks vulnerable for now. Current account deficit (i would rather avoid trade deficit as it is a narrower benchmark) to GDP could well scale the handle-4 and that indeed is  an ominous event. I was a big fan of the sell rupee (and buy dollar) trade idea most of the times this year and that could come to pass. We should be prepared for a sustained rupee weakness in the months ahead.

Call it coincidence - rupee just got its new symbol and must probably be the fifth currency in the world of economics to get that coveted honor. And the crystal-ball gazing fraternity must soon be wondering if there was some bad vastu around its curves that makes rupee weaker. Much similar to the new bull that was installed in front of BSE a few years back and how much flak it drew for the sensex crash during those days!!