Rupee drops 11% in 2013; Fed taper, elections to be key in 2014

Mumbai: The rupee ended with gains on Tuesday, but posted a 11 percent fall in 2013, ending a tough year marked by a descent to a record low and suffering from continued concerns about its outlook next year.

Although the rupee closes well above a record low of 68.85 per dollar hit in late August, thanks in part to emergency measures taken by policy makers, the rupee still ends 2013 as Asia’s third worst performer and with a third consecutive annual decline.

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While a narrowing current account deficit has allowed the rupee to withstand the start of reduced bond purchases by the Federal Reserve, analysts say confidence is still low in an Indian economy suffering from low growth and high inflation.

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Analysts also warn India is still too dependant on foreign flows, and needs structural reforms beyond measures such as curbs on gold imports to have a more sustained impact on the current account.

“I maintain a cautious view of the INR for now given the still large current account deficit. While lower following import restrictions, $50 billion deficit remains large funding gap to fill and hard to ignore when portfolio flows start to slow and FDI fails to materialise,” said Nizam Idris, head of fixed income and currency at Macquarie Group in Singapore.

“I forecast a flat USD/INR around 62 for the short term, but the pair is likely to head higher towards 66 by the second half of the year if broader economic reform doesn’t get off the ground soon,” he said.

The partially convertible rupee closed at 61.80/81 per dollar compared with 61.91/92 on Monday, in a range bound trading session. For the month, it was up 1 percent and in the December-quarter gained 1.3 percent.

Foreign institutional investors have been buyers of over $20 billion in stocks this year as local benchmark indexes hit record highs. The debt markets saw outflows of $8 billion, primarily since mid-May, but have turned positive in December.

Beyond how the economy fares, analysts say elections will be another key theme in 2014, with a strong stable government likely to usher in the prospect of more reforms and support the rupee.

How the Federal Reserve further closes the tap on easy money will be another wild card for the rupee.

The one-year forward rose to 498.50 basis points from 315.50 basis points at the start of the year, reflecting the demand for forward dollars.

Reuters