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The rupee made an all-time low of 60 on Thursday, after the Federal Reserve confirmed its plan to end the asset purchase programme, which it started in 2008.
The demand and supply is seen deciding the move for the rupee against the dollar .
The recent correlation between the euro and the rupee, and dollar index and the rupee, seemed to have broken.
The Dollar Index slipped from 84 to 80 levels while euro climbed up from 1.29 to 1.34 levels.
This move was not followed by the rupee.
The sync of the rupee with international markets was missing. The only factor which impacted the move was pure demand and supply.
The demand was seen not only from local importers but also from foreign investors who have invested in the Indian bond markets for higher yields. The recent announcement by the Federal Reserve increased the yield difference between the US and Indian bonds, resulting in reduced arbitrage.
The US bond yield has increased to 2.45 per cent from 1.38 per cent in July 2012 , while the Indian 10 year G-sec yield are currently at 7.38 per cent.
The high hedging cost is seen giving lower, in fact negative returns to the investors. The investment opportunities in the US bond market seems more lucrative than the Indian bond market. Hence foreign investors are pulling out money from here and investing back in the US.
The high current account deficit puts further pressure on the rupee. Being a net importer nation, we are dependent on foreign flows.
The internal fundamental problems are acting as major hurdles to revive the investment cycle.
The fact that the flows will further reduce in time to come, is leading to a panic situation in the market.
The rupee has almost hit our expected target of 60 and we continue to maintain our bearish outlook on it. The major factor behind this could be the fresh bull trend that we are expecting in the dollar.
We expect the dollar index to move to 87-88 levels by the year-end. While we continue to see probability of the rupee breaching 60 levels , we expect the rupee to move towards 56-57 levels and correct from there.
(The author is Founder & CEO, India Forex Advisors. The views are personal.)
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