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Tuesday, Oct 26, 2021
Outlook.com

The Market's Will

The rupee's recent slide has more to do with speculation than with politics or economic reality

The Market's Will
The Market's Will
outlookindia.com
-0001-11-30T00:00:00+05:53

ON Monday April 6, when the Bombay Stock Exchange Sensitive Index crashed by a whopping 167 points and rupee plummeted to a seven-month low—thanks to a raging Jayalalitha determined to secure her pound of flesh from the ruling coalition—the only people cheering were the heads of treasury operations at a few banks. Points out K.N. Dey, senior vice-president, Mecklai Financial & Commercial Services, a leading forex trading firm: "Monday's trading was purely speculator-driven. And between banks, some of which made a killing in the foreign exchange markets. Forex trade in the country is becoming increasingly inured to political rumours and threats of instability." That sentiment is echoed by the treasury head at a state-run bank, who feels that political seesaws could cause only a slight flutter in the market and "volatility, if at all, will be temporary". The central bank, he says, would keep the rupee safe.

He's right. Since August 1998, the Reserve Bank of India (RBI) has tightly reined in speculation and daily turnover in spot rupee-dollar trade has touched a paltry $100 million to $200 million of late. Last week was the first time this year that the rupee showed huge volatility against the greenback. The last time the Indian currency fluctuated wildly was in August last year, when the RBI hiked the repo rate by 3 percentage points and put a stop to arbitrage between the call and the forward markets (these curbs were relaxed later). On August 20, the rupee quoted at 42.82/92. In between, the forex market has been pretty quiet, thanks to an industry-friendly budget and regular announcements of reformist policies.

On Monday, however, Jayalalitha's threat saw the rupee at one stage plunge to 42.78 level, down 35 paise from the previous closing. But it closed higher at 42.68/70 as the RBI...

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