Raghuram Rajan not the only reason for rupee fall

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Its not just Raghuram Rajan factor that is pulling down the rupee.

The unit continued its fall for the third consecutive day against the dollar closing 19 paise lower at Rs 67.45 against the dollar. The rupee touched a intra day high of Rs 67.11 against the dollar on reported dollar selling by RBI but by afternoon heavy selling by foreign investors wiped off the gains.

Some forex dealers said that reports in a Bengali daily about Rajan not wanting a second term as RBI governor is also causing anxiety in the markets. Rajan’s term of three years come to an end in September 5.

The market is weighing on a number of things indicators both externally and internally before pulling out the dollars from India depreciating the rupee according to forex experts. First worry for the markets is whether the US Federal Open Markets Committee (FOMC) would hike interest rates when it meets later this month or in its July meeting. With the household sector income and corporate sector earnings improving there is a global expectation on the rate hike. But then experts say that rupee is also overvalued compared to its peers, so a depreciation is expected.

Ananth Narayan, MD and regional head of financial markets, Asean & South Asia at Standard Chartered told dna, ” Globally the dollar has been improving and we expect it to improve against the rupee. The expectation that the Fed may hike rates is also leading to sell-off in the emerging markets.” According to the real effective exchange rate (REER) the rupee is also overvalued by 13%, which will obviously result in the rupee to be devalued to certain extent, he said.

“Of course Rajan factor will play on the market since he build credibility but our markets are resilient and have withstood the onslaught of the global financial crisis. Rajan was a lucky charm for our markets,” he said.

Jamal Mecklai, managing director and chief executive officer of Mecklai Financial & Commercial Services, told dna, “Whether Rajan continues or not that factor will play on the markets for a short time. He took over at a time when the markets were crazy, he has brought in credibility and stability. A lot will depend on who takes over from him but it takes time to build credibility, in case he is not continuing. But since our macro- economic fundamentals are strong rupee will be pull back after a month of volatility. The market is also weighing the FOMC meeting, inflation etc.

“We expect the rupee to depreciate in the medium term. But the US hiking rates though may be volatile initially but it signifies improvement in global growth, which in the long run will be beneficial for the rupee.”

D K Srivastava, senior economist at EY, said, “If the reports of Rajan not wanting a second term are true there may be short-term volatility after which the markets are bound to bounce back due to our strong macroeconomic fundamentals.”