NEW DELHI: When the rupee tumbled 20% against the dollar in four months, between August 9 and December 15, fingers were pointed at foreign institutional investors (FIIs), who were big sellers of Indian stocks. But data for the period shows that FIIs still brought in more money than they took out, though this net figure was about a tenth of the amount in the corresponding period a year ago.
A reading of the other components of 'balance of payments' - which records India's transactions with the rest of the world - shows dollar inflows were reasonable during this period. Their velocity may have slowed because of a grim economic outlook, which would have put pressure on the rupee, but not enough to make it crumble.
So, then, what explains the slump? On speaking to forex traders, experts, exporters and bankers, a possible explanation emerges: on top of the general weakness, the equal and opposite actions of importers and exporters triggered a storm, and sent the rupee into a freefall.
"Initially, greed and fear drove down the rupee," says Jahangir Aziz, the Asia economist of JPMorgan. Greed among exporters, who did not convert their dollar earnings when they saw the rupee falling, hoping the Indian currency would weaken further and enable them to realise more. And fear among importers, who had left their exposure un-hedged and who rushed to buy dollars when the rupee started falling.
Importers sought dollars, but exporters held them back. The resultant shortage dragged the rupee down in the forward market. And the spot market, which takes its cues from the forward market, followed suit. It was history repeating itself.
Source : economictimes.indiatimes.com