Rupee Collapse an Unnecessary Scare ET dt.

12-04-13
The rupee is likely to keep strengthening
A new scare is haunting the markets, with several brokerages reporting a likelihood of the rupee
touching 60 to the dollar. This looks rather unlikely and economic agents would be well advised
not to give in to irrational fears. The rupee has actually been strengthening and, with fiscal
correction on course, reining in inflation and the external deficit, the trend is only likely to
continue.
The real effective exchange rate (eer! of the rupee has been moving up after "ovember. #rom
$ecember to %arch, it has moved up from &0'.(6 to &06.'0. This is the six currency trade
weighted index with )0&0*&& as the base. The trend is similar for the index with )00'*0( as the
base. The eer captures the effect of both the external deficit and inflation. This suggests that the
current account deficit has improved significantly in the last +uarter of )0&)*&,,bringing down
the deficit for the year as a whole. The Asian $evelopment -ank estimates the deficit to be (.
of /$0, not the most comfortable figure, admittedly, but certainly far less alarming than the
deficit numbers of the first three +uarters. 1f the government brings in someone with a modicum
of intelligence to head the food ministry, food grains will cease to push up inflation, containing
inflation as well. 2ith clearances picking up definite steam, investment activity can only rise,
pushing growth up. -ut what of the effects of robust 34 growth
5ust as capital fled to safety back home when things went bad, even from emerging markets that
were still holding up, revived confidence should embolden funds to move out of the 34 again,
from safe but low*yielding gilts to riskier assets including emerging market e+uity. And reviving
34 growth should boost both 1ndian merchandise and service exports to that country and to
countries like 6hina that supply the 34. 7ngoing fiscal correction, a likely stronger current
account and reduced risk aversion of 34*based funds should all combine to help boost the rupee,
not push it down.