The next week is likely to see heightened volatility for the rupee given that the currency has two major events to contend with.
The first is the Federal Reserve Open Market Committee (FOMC) meet which ends on September 19, in which the Fed would take a decision on tapering off its quantitative easing programme or asset purchase programme.
The US Federal Reserve has been buying assets worth $85 billion each month, which actually means pumping money into the US economy to help sustain growth. Now, a lot of this money finds its way into emerging market equities and India has received large amounts of dollar inflows into its equity markets, which has helped sustain the rupee.
Now, if this liquidity dries up with the Fed deciding to taper off its QE3 programme, Indian markets could fall. The withdrawal of money from equities would also mean pressure on the currency, since there would be dollar outflows.
Earlier this month, mere reports of tapering off of quantitative easing sent the Indian rupee into a tailspin. Not only the Indian rupee, but emerging market currencies particularly those from Indonesia, Turkey and South Africa collapsed in trade.
Should the Fed decide against tapering off, the currency could well appreciate this week. It is widely expected that the Fed could taper to the extent of around $10-billion in asset purchases. Should the amount be in excess of the same, we could see some reaction in the currency markets.
On Sept 20, the RBI will meet to decide its own monetary policy. It would be interesting to see if there are further measures taken by the RBI to battle the ailing rupee.