Measures help Indian rupee rebound

India Dispatch: The Indian rupee and stock markets rebounded sharply yesterday, as they continued to benefit from measures outlined by the new central bank governor last week as well as global sentiment.

A busy New Delhi street. The rupee strengthened after the central bank governor announced plans to attract more foreign deposits. Saurabh Das / AP Photo

The Indian rupee and stock markets rebounded sharply yesterday, as they continued to benefit from measures outlined by the new central bank governor last week as well as global sentiment.

The rupee, which has plunged to a series of record lows in recent weeks, strengthened to trade below 64 against the dollar, gaining about 2 per cent in trading yesterday and 3.7 per cent compared with one week ago.

The benchmark S&P BSE Sensex also continued its rally and surged 3.7 per cent yesterday to close up at 19,997.10.

Raghuram Rajan, who took over as the central bank governor last week, has announced plans to attract more foreign deposits and relax rules to help exporters and importers to hedge their exposure to the currency risk, among other measures.

Risk appetite improved globally as fears of a strike on Syria eased and positive data out of China also helped to boost Indian markets.

"In the short-term the appointment of Rajan has definitely boosted risk sentiment," said Gaurav Kashyap, the head of futures at Alpari, a global online currency and commodities broker.

Mr Rajan's "immediate focus remains currency stabilisation and in our view the announced measures could attract US$10 billion to $15bn in the next two to three months", according to analysts at Standard Chartered.

"The likely additional inflows as a result of these measures should alleviate concerns about the funding of the current account deficit."

This has helped to boost confidence following the rupee's recent slide and amid the broader flight of capital from emerging markets on expectations of the United States Federal Reserve winding down its stimulus programme. "The relief rally will be short term in nature as markets will move into range bound trading in the lead up to next week's make or break FOMC announcement," said Mr Kashyap.

"Whether Bernanke can pull the trigger on the proposed taper in September remains to be seen."

He points out that the announcement later this month will be crucial for the direction of the rupee and could push the currency to a new all-time low.

"If the taper is introduced in September as markets are largely expecting, we can expect to see a test of that all-time high at 68.84 followed by 70 levels in extension.

On the flip side an extension to their current programme would see the rupee benefit with a move to 60-61 likely."

Other analysts agree that the positive reactions in markets in India could be short-lived.

"Reactions to Dr Rajan's statement have been overly positive with markets probably interpreting his stance on monetary policy as reversal of the tightening implemented by his predecessor, Dr Subbarao," said Dhananjay Sinha, the head of institutional research at Emkay Global Financial Services.

"Recent US economic data releases strengthening the case of tapering, the ten-year US treasury yield has risen to a two-year high of 2.94 per cent," Mr Sinha added. "Emerging market currencies continued to depreciate sharply even as the USD index is showing strengthening bias ahead of Fed's statement on September 17-18th.

"With all evidences supporting the base case and strong momentum scenario of the Fed, it is likely that INR/USD will revert to a weakening trajectory soon."