With rate hike by the US Fed now almost certain, foreign investors will exhibit an impulsive reaction of withdrawing money from India, thereby adversely impacting the rupee and creating pressure on Reserve Bank of India, according to Care Ratings.

The credit ratings agency observed that most of this phenomenon (of a depreciating rupee) is due to expectations of a Fed rate hike and will not be long lasting.

“Just like how the QE (quantitative easing) tapering news was more potent than the actual tapering, markets will self-adjust once the rate hike is announced as this news gets factored in,” it said, and added that at this stage however, the central bank’s comfort level has to be gauged to understand if an exchange rate is being targeted which can create expectations.

Stable BoP The agency said the balance of payments appears to be stable to justify a range of around ₹66 per dollar though volatility in foreign institutional investment (FII) flows and demand-supply imbalances can keep it closer to ₹66.5 range.

Going ahead, the agency said it expects the situation to even out once the dollar stabilises making the inflows into the Indian economy and other emerging economies more favourable.

This will also give a clearer picture to the RBI to take its stance in its next monetary policy.

Rupee rebounds The rupee on Tuesday pulled back from the fresh two-year lows it hit the previous day. Dollar sales by exporters and foreign banks helped the domestic unit strengthen to close at 66.93 against the previous close of 67.10. Intra-day, the rupee hit a low of 67.11 and a high of 66.9275 per dollar on Tuesday.

Care Ratings, in its report on ‘Understanding the Fed rate hike’, said the markets have reacted with panic just as the Fed meeting begins today. Interest rates have started moving up in the domestic market and the rupee has declined once again to cross the psychological threshold of ₹67/dollar.

FIIs pulling out It reasoned that the certain increase in rates has caused foreign investors to pull out from emerging markets. While these countries benefited from the QE measures which supplied cheap money that was partly used to invest in these markets, a withdrawal means that there would be less interest in them.

“FIIs have withdrawn $1.64 billion in November from the Indian market and the outflows so far in December are $852 million.

“Hence, while our overall balance of payments situation looks stable as evidenced by the movements in forex reserves, the rupee continues to be under pressure as demand-supply imbalances have resulted also at the prospects of FII pullout and further depreciation. Demand for dollars has increased as importers are rushing in,” the report said.

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