The Indian Rupee was one of the worst performers in the currency markets in June. It had a decline of over 10% as QE tapering fears gripped the market. Emerging markets were hit hardest, but given India’s growth slowdown and lack of structural reform the Rupee touched two all time lows in the span of two weeks in the last week of June and first week of July.
Comments from Ben Bernanke have cooled the expectation of the market regarding the end of QE. A higher than expected unemployment claims took the wind out of the employment recovery sails momentarily. The USD retreated across the board.
The Reserve Bank of India has been powerless to stop the decline and has declared openly that they don’t have a price target and will not defend one. Behind the scenes however there have been rumours about reducing speculative flows by talking to directly to dealers. Another soft tactic used by the Central Bank is the fact that they have directed Oil refiners to centralize their USD transactions with a single designated bank to avoid additional market speculation if they seek competing bids on their currency transactions.
The RBI has said on record that there can’t be an interest rate cut if market volatility continues. Global factors have aligned to push the Rupee even lower than its economic fundamentals would value the currency. The European debt and social crisis, the Japanese battle with deflation, the slowdown in China and the potential end of QE have been singled out by the IMF as the biggest risks to global growth.