Emerging market currencies hit; is the rupee likely to fall further?

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Emerging market currencies hit; is the rupee likely to fall further?
On Friday, the South African Rand plunged to a 5-year low, the Ukraine's Hryvnia sank to a 4-year low, Turkish Lira hit a lifetime low and Argentina's Peso sunk 20 per cent for the week.

In India, the rupee hit a 9-week low as the contagion spread to emerging markets. The currency closed down 73 paise at 62.66.

Clearly, there is a risk-off trade and foreign investors are beginning to pull out cash from emerging market assets, which, if continues could put pressure on emerging market currencies, including India.

The big trigger would of course come from the US Federal Reserve Open Market Committee meet, which ends on Jan 28. Should the US Fed decide to further ease its QE3 programme, expect the rupee to fall sharply.

The QE3 programme ensures that the US Fed is presently buying bonds to the tune of $75 billion each month. This bond buying programme has been reduced from $85 billion seen in the month of December.

Should the Fed decide to further reduce its bond purchases at its meeting, it would mean less liquidity, which is not good news for emerging market currencies including India.

A lot of the liquidity induced by the bond purchases has found its way into emerging market assets, including Indian equities. Reducing the liquidity poses a big risk for countries like India.

In fact, easy liquidity has ensured foreign institutional investors purchase shares worth a net Rs 1,13,135 crore in 2013. This is a staggering sum and could have been largely prompted by easy money available through programmes like the QE3.

If, foreign funds withdraw money from Indian equities, expect pressure on the Indian currency. However, the RBI is likely to intervene and the damage on a falling rupee might be contained. In fact, the RBI is in a much better position to contain the damage of a falling rupee, than it was in Sept 2013, when the rupee plunged to a lifetime low of 61.81 against the dollar.


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