Rupee’s next fitness text

The rupee has spent a happy week so far amidst positive domestic and international turnarounds. So far, the national currency has made a smart come back from near to the edge of 70 per dollar to 63.4 within a week and couple of days time.

 A positive trade data has pulled the currency first, followed by some surprising policy indication by Dr Raghuram Rajan. An aborted Syrian intervention and softened crude prices produced relief. Weak US employment data strengthened Rupee’s confidence in the market.

As per the SEBI data, one out of every five foreign investors who have flown during the last three months has returned. This is felt in the stock market even. Despite not having big macroeconomic news, the stock market is riding at reasonably high levels, indicating the staying psychology of foreign investors in the equity market.

The RBI also has shown necessary skills to support the domestic currency with a number ofmicro measures and policy decisions including foreign currency swaps and NRI deposit promotions. Such measures have stabilized the currency back at early 60s. An attractive feature of the RBI’s approach is that it has not lost the foreign exchange reserve much in stabilizing the currency.

 But the rupee is going to undergo the next fitness test as FIIs are awaiting the announcement effects of Bernanke’s tapering plan. The Fed’s tapering plan is now going to happen on an expected line, without producing shock impacts. And many emerging market central banks are now better prepared to meet any contingency. Similarly, the Fed may also show some sympathy to the concerns of the EMEs. Hence, an orderly exit from  QE may be the most possible move from Bernanke.