By Vipin Agnihotri
In my opinion, rupee has lost some of the aura of invincibility that surrounded it over the last 15 months. According to my estimations, between the end of January and the second week of February, rupee has shed around 3 per cent of its value against the dollar.
Interestingly, this period has seen tremendous major shift in market perceptions. For example, traders are reconciling to the prospect of medium-term decline in the exchange rate. Generally speaking, depreciation is a shot in the arm for beleaguered exporters. I have a talk with some financial experts and they were of the view that the economic cost of sharp depreciation in the present global environment will outweigh the advantages.
Point to be noted here is that an appreciating currency more or less act as a shield against "imported" inflation arising from high global commodity prices. In my opinion, domestic inflation has increased due to a combination of local price impulses and global pressures.
The question now arises: Will rupee depreciate any further? The answer of this question will solely depend on how the global risk environment pans out. Carry trades will also be an important factor. It has been noticed that investors are borrowing cheap in low-interest markets such as Japan and investing in higher-yielding assets such as Indian stocks. You may not believe at first but its 100 per cent correct that more than 40 per cent of incremental flows into India last year came from carry trades.
According to official SEBI data, FIIs actually bought a net amount of $773 million between January 1 and February 10. The pivotal factor here is that FIIs is more or less turning into net sellers, dumping Indian stocks and rushing to safe havens such as US treasury market.
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