On 10 August, the rupee closed at 68.85 to a dollar. On 13 August, in the first 15 minutes after the foreign exchange market opened following the weekend, the rupee was trading at 68.45 on Clearing Corp. of India Ltd’s forex dealing platform. No one realized the rupee had fallen to 69.45! The rates were corrected later with the “big figure" changed to 69.
Similarly, on 14 September, in the beginning of trading hours, there was a freak trade at an exchange rate of 72.69 to a dollar when the rupee was actually valued at 71.70.
These are not “fat fingers" errors caused by pressing the wrong key of the computer while trading. They are “big figure" errors. When the currency market turns highly volatile, dealers often omit the big figure while giving quotes, presuming that it does not need to be specified.
The implied volatility—a measure of the market-expected future volatility of a currency exchange rate from now until the maturity date—of USD/INR for one-year tenure has risen to 7.12 currently, from a range of 5.5-6.5 in the past one year. Is it too high? In 2014, when the National Democratic Alliance government took over, the implied volatility was 11 and, in 2013, when the rupee was on a free fall, it was 13.
The lowest point that the rupee reached in the latest round is 72.91. Between 31 March, when the rupee closed at 64.97, and 14 September (71.85), the local currency has depreciated 10.59%. In 2013, the rupee lost almost 28% between 30 April and 28 August, if we take the lowest levels in intraday trading.
The market listened to Prime Minister Narendra Modi. The currency reversed the trend on the news of Modi considering measures to arrest its fall. While the Reserve Bank of India (RBI) has kept quiet, economy affairs secretary Subhash Chandra Garg has been doing all the talking. Let’s hear him out.
On 29 June (when the rupee hit an intraday low of 69.09), Garg said the government has adequate forex reserves and can opt for another tranche of foreign currency non-resident deposits. On 14 August (a day after the currency lost 110 paise), he attributed the fall to “external factors", and reportedly said there is nothing to worry about and even a 80-level is not a “serious thing" as long as the depreciation is in line with other currencies (the rupee crashed to record low of 70.09 on that day).
Later, Garg tweeted on the “mischievous attribution" of a statement to him in connection with the fall of the rupee. He disagreed with the “reporter’s hypothetical statement that rupee may fall to 80". On 18 August, Garg expected the rupee to stabilize at 68-69 a dollar; and on 29 August, after it closed at 70.59, Garg said at the current level, the currency is fairly stable, maintaining the same view—“between 68 and 70 is where rupee will mostly remain".
On 10 September, when the rupee crossed 72 to a dollar, Garg reiterated the right level of “68-70" and did not “expect it to go beyond". Stating 72 to a dollar as “perhaps an outer limit or beyond the reasonable outer limit", he issued a veiled threat to speculators: “Those who are trying to take advantage of this contagion feeling in emerging markets may come to grief later".
Finally, on 12 September, Garg said the government and RBI would do everything to ensure the rupee does not slide to unreasonable levels. RBI, which historically steps in not to protect the value of the rupee but iron out the volatility in the currency market, intensified intervention after the rupee crossed 70 and turned aggressive when the local currency threatened to breach the 73-mark. Its forex reserves dropped from $426 billion on 13 April to $399.3 billion on 7 September.
Clearly, it seems 72 is the level we are looking for the rupee even though it has not been a soft landing. On the so-called real effective exchange rate, or REER, basis, the rupee was overvalued some 14.5% (on 36 currency export and trade weight basis) and 22.7% (on six currency trade weigh basis) in August.
On most macroeconomic parameters, India is now better placed than 2013. The speculators in the non-deliverable forwards, or NDF, market are also not as active as they were in 2013, pulling down the rupee. The difference between offshore and onshore forward markets, which was 75 to 100 paise in 2013, is now in the 15-30 paise range. Most analysts are baying for another NRI bond issue, but there is no need to go for this as money does not come free. Greater attention to shrinking the current account deficit and fiscal health will do the trick. And the onus for this is on the government, not the inflation-targeter central bank.
PS: Banker’s Trust will take a break next week.
Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank. His Twitter handle is @tamalbandyo. Comments are welcome at firstname.lastname@example.org.