How the Rupee runs

By: Pravin Palande/ Forbes India

The Indian rupee is likely to be volatile for a while, spelling bad news for companies that have not hedged currency risk.

A sudden wave of volatility in the Indian rupee has increased the degree of risk for companies and the financial system as a whole. Over the past three months, the rupee has fallen 12 percent against the dollar and could even slip to the 52 mark if European debt worries persist. Though many analysts foresee the currency clawing back to around 46, they believe that will take a while.

Many analysts think this volatility can be linked to jittery investors taking flight from emerging markets and moving to US government bonds. Foreign investors have indeed taken money out of Indian stocks, but the 65 percent correlation between the rupee and the stock market really does not justify the linkage as the impact of net FII outflow was not strong enough to justify the 12 percent fall in the currency. Net FII outflow in August and September 2011 was at around $2 billion which is low for a forex market that trades $75 billion on the rupee every day.