Rupee Turbulence: Where is it headed?

The rupee has had a turbulent time in this calendar year. It started from a low of Rs 53.3/$ at the beginning of January and then strengthened along the way to end the month at Rs 49.67, which was below the psychological barrier of Rs 50/$. It remained fairly stable during February between Rs 48.68 and Rs 49.65. However, in March, it went past the Rs 50 mark and ended at Rs 51.16.

Things have not improved during April as the rupee continues to weaken and declined continuously from Rs 50.58 to a low of Rs 52.79 on 24th. The question is which way will the rupee go?

The rupee has become particularly volatile in the last two months driven ostensibly by both fundamentals and sentiments. Trade data available shows that while exports continued to be buoyant; the trade balance did sharpen along the way.

FII inflows which rebounded in December and continued to flow in large numbers in January and February have slowed down substantially and are in the negative zone in April. In fact, they climbed from $ 3.9 bn in December to $5.4 bn and $7.4 bn receptively in January and February. In March they were just $41 mn and turned negative in April.

The slowdown can be attributed mainly to a certain modicum of uncertainty relating to some of the budgetary proposals as well as the relative good news in the USA where the recovery is well on the way which has diverted funds to an extent.