Thursday 3 October 2013
Such were some of the questions asked at Armourers Hall in October at the City of London’s breakfast roundtable discussion around EMFX and in particular Indian Rupee.
The announcement of tapering in the US has affected emerging markets (EM) currencies this year perhaps far more than expected. Whilst the trading of Indian rupee is still a relatively new development across global forex markets, (which may partly explain the mismatch between the volumes quoted in the Indian press and the actual numbers that some institutions are seeing) its movement this year has for some - been very very profitable.
The RBI has expressed strong concern over the spike in speculative trading that has been seen as a result of Rupee volatility and it is unique in that its the only major EM currency ( with the exception of China ) which is traded in larger volumes offshore than onshore . This makes its NDF markets particularly relevant, and a big headache for the RBI.
For developed markets it may still be possible for central banks to intervene with some success. However there are a large number of factors that determine whether there is enough global market confidence in that institution to intervene. These include the perceived view of the central bank, exchange rate, amount of reserves and how open the country’s capital account is looking. For EMs therefore, central bank intervention is generally not advisable.
Central bank intervention is risky for even developed countries and, for example the Swiss Central Bank recently, it can be a very costly move. Coordinated central bank intervention is the less risky option. ( this proved successful for Japan in 2011) But where does that leave the RBI?
Conceivably, the upcoming BRICS bank, would give EMs such as India more of a chance of successfully introducing intervention as an effective tool.
It would need to be partnered with deep pocket economies, and if that bank were situated in London…. then that might just change the way the market thinks and trades Rupee.
The internationalisation of the rupee is on the RBI’s agenda and there is reason to be hopeful given the new RBI Governor’s positive moves towards internationalisation, however at present they are not in a hurry.