The Indian rupee depreciated against the greenback to touch an all-time low of 58.15 per dollar in a recent trading session because of the perceived recovery in the US economy.
The perceived recovery of the US economy caused fear that the US Federal Reserve may taper off its quantitative easing programme and this led to the rally of US dollar against many emerging market currencies.
Also, the minutes of the Federal Open Market Committee meeting on May 22 and recent remarks by Fed Chairman Ben Bernanke to the US Congress hint that the American central bank may taper off quantitative using soon.
Thus, the weakness of the Indian rupee is not an isolated event. Some analysts attribute the fall in the Indian rupee to the heavy selling of debt by foreign investors.
Since May 22, FIIs have sold debt worth 15,402 crore in the Indian market . But inflows into equities have so far been positive. If FIIs were to start exiting shares, the rupee’s fall could accelerate.
Most currency market participants expect the rupee to remain volatile in the near term. The stress on the rupee is a result of vanishing arbitrage in the short-term debt market. While the US treasury has inched up to around 2.15 percent, the Indian 10-year bond has lost around 100 basis points from its peak of 8.2 percent.
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