At present, the external situation based on fundamentals is satisfactory – the foreign portfolio investment (FPI) flows have started turning positive of late. Trade deficit has been widening, but it is not a major concern, as oil prices have stabilised. The US Federal Reserve’s future action is known, and there could be few surprises here. Also, the domestic economy seems to be on the move in the right direction, and the forex reserves, though declining, are fairly robust to cushion such shocks. Therefore, there should be few reasons for concern, and the rupee should revert to the 69 level finally.
However, the interim period will be volatile and it is here that the right sounds are heard from the RBI. It is not so much action in terms of supplying dollars which will not help right now, but ‘talking the market’ which is important to ensure that the speculators do not try and cash in on this situation and drive the rupee downwards. It will hence be interesting times for the market, and the holidays in between should provide some cushion.
The author is chief economist, CARE Ratings
Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.