Wednesday saw the rupee touch that level against the US dollar, a new low. The official explanation has been that the Indian currency has been tumbling because of global risk aversion due to the continuing uncertainty in Greece. Others point to domestic problems such as the high current account deficit.
But is that all there is to the story? After all, neither the European crisis nor the large current account has come as a complete surprise. Even the decision by Standard and Poor’s to lower India’s outlook from stable to negative in April did not send the rupee hurtling down.
So what has happened? It is perhaps time to look at what is actually happening in the markets. A recent report by Credit Agricole, a French bank, uses data from the so-called non-deliverable forwards (NDF) market to argue that it is not foreign speculation that has pulled down the rupee, as was the case during the Lehman crisis. This is because there is very limited difference between Non Deliverable Forward (NDF) points and onshore forward points.
The NDF markets trade currencies like the Indian rupee that are not fully convertible. The NDF markets help global investors hedge their positions in currencies that do not offer forward markets for non-domestic players.
“The direct reason why the INR is where it is --- in free fall and at record lows --- is not so much due to India’s macroeconomic conditions or foreign speculation … What we found new was the sentiment on the ground, especially among corporates and FIs in Mumbai. We were struck by their degree of pessimism over the growth outlook, the quality of policymaking and the currency,” Daniel Kowalczyk, senior economist at Credit Agricole said in a recent note.
He argues that Indian companies are shorting the rupee as a result of their glum outlook. Their unhedged foreign debt “is exacerbating the situation as businesses will have to buy FX (foreign exchange) to meet their obligations, he adds.