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KOTAK CONNECT
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INR - Evolution and
Future Outlook
SEPTEMBER 21, 2012
From
being amongst the first few issuers of coins as currency, from as early as
6th century BC, the rupee sure has come a long way! The word rupee (or
rupya in Sanskrit) basically means a coin essentially in silver that is
shaped; stamped, impressed upon, which soon gave way to notes and paper
currency as we know today.
Pre
Independence, the Indian Rupee was legal tender in several British
Colonies especially iin East Africa and Asia. It continued as main mode of
currency in Oman, Qatar and UAE till the 1960’s before being replaced.
Today, the rupee still rules the roost in Southall in UK and Springdale in
Canada, known for their sizeable Indian populace.
The
correlation of the Indian Rupee to the currencies of developing economies
has always been extremely rocky and the start of this can be attributed to
the era post the Prussian War or Circa 1870-71. The entire global economy
then moved to what was known as a Gold Standard – ie the standard exchange
currencies were fixed against reserves of gold. This led to a gap between
the countries that used silver as a medium for exchange given as they had
no access to gold like Japan or given as they were part of colonies like
India, and prohibited from converting the standard of exchange to gold.
India’s currency has always been in silver and this made trading with
developed economies difficult as most of its trade was either with Great
Britain or countries that traded with Gold. Silver increasingly got
demonetized as newer reserves were being discovered. The impact of such a
huge rift was profound as the fall of the rupee against the Pound was
directly proportionate to the fall in the prices of silver.
Post
Independence, the economic crisis of 1966 and 1991 halved attributed to
the weakening of the rupee further in global markets. The trade deficits
of 1950, resultant inflation and the stopping of foreign aid, the war of
1965 and drought devalued the rupee further. Subsequent liberalisation
helped stem the flow till 1991, when India started facing its next wave of
Balance of Payment Issues from 1985 – 1990. With imports restricted and
high deficit, the rupee was devalued yet again especially by 1999.
Between 2000 – 2007, the rupee stabilized quite a bit and reached levels
of 39 (in 2007) as versus the USD. With high remittances, sustained
foreign investment inflows and the development of exports in the sectors
of outsourcing and technology, the rupee led a strong battle against the
USD. However, the subsequent global economic recession since 2008 has led
to it steadily losing value ever since.
Indian
could continue to remain very volatile in the coming months. Over the last
few days, have seen the rupee react positively given news of expected and
much needed political reforms. The sudden exigency from the GOI to unleash
a wave of reforms augurs well for the Rupee. However, beyond the
short-term, for Rupee to strengthen in the medium-long term, the political
stability remains a key factor. If the political climate does not
deteriorate materially, then the gains in the USD could be capped around
54.70/55.00 levels. At the same time, commitment from the US Federal
Reserve towards an open-needed quantitative easing would weigh on the USD
over the short-medium term. Over the near-term, rupee can strengthen
towards levels of 53.40/53.00 levels.
As
trader, look to sell rallies toward the level of 54.80/55.00 on spot,
especially in the two or three month futures, which trade at a premium for
a target of 53.20/53.00.
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