Whither the rupee?

The pressure on the currency will recur unless the RBI takes the rupee by the horns and brings it back below 87 at least, telling the market it is still the boss

- JAMAL MECKLAI

THE RUPEE'S SUDDEN, sharp (nearly 1%, to 89.49) fall on Friday afternoon caught most people off guard. Over the preceding few days, the rupee had steadied from its lows of 88.70 and even hit a peak of 88.50-although, to be fair, that's hardly a huge appreciation-on Wednesday. This is despite the atrocious trade figures reported for October (deficit at an all-time high of $41.68 billion, with exports falling by 11.8%), which came on the heels of a large deficit in September ($32.15 billion, which was driven largely by the goods and services tax cut-driven boom in purchases for Diwali). People were beginning to believe that a trade deal with the US was not far off-indeed, Reserve Bank of India (RBI) Governor Sanjay Malhotra mentioned as much.

The cause widely ascribed to the rupee's fall was an ebbing of this belief, although it is hard to see how something that touchy-feely could result in such a sharp drop. More likely the dramatic increase in Japanese bond yields the 30-year crossed 3% and the 10-year nearly reached 2% from just 1% a year ago-triggered an unwinding of carry trades (where people borrowed in yen and invested in other higheryielding currencies), which in turn triggered the sharp selling of rupees in the non-deliverable forward (NDF) market. Buyers' stop losses, which were amassed at 88.80, were triggered, which led to the mayhem.