At one stage earlier this month the rupee looked set to strengthen to the 60 levels. But now it looks set to weaken to the 64 levels. The currency closed at 63.70 on Tuesday.
Fears of QE tapering is back to haunt the markets. On Friday, the US jobs data was rather robust which clearly signalled that tapering could begin later this year, rather then next year.
There are also reports that the oil marketing companies have returned to the forex markets. It maybe recalled that the RBI had opened a special window to meet the dollar requirement of banks. With the window set close by the end of the month, there could be sudden demand from oil companies.
Even if the Fed announces its tapering in December, the RBI would be prepared to battle the rupee, if there are dollar outflows, particularly from foreign funds.
This is because the RBI has already received around $16 billion from the dollar swap facility it had offered banks. This amount could well be used in the forex market for intervention to prevent a slide in the rupee.
Meanwhile, data suggests that there is very little to support the rupee. Foreign fund inflows into the stock markets seemed to have considerably reduced, as gauged by the net FII inflow into the cash markets. On the other hand weak IIP data and surging retail inflation increase the worry for the rupee.
Bond yields have started rising and bond prices dropping, which should affect banks. Some banking stocks like Yes Bank, Axis Bank and ICICI Bank have already reacted sharply in the last few days, due to the falling bond prices.