Mumbai: A decision on a US rate hike, an appreciating dollar and outflows of foreign funds will further dwindle the rupee value, foreign reserves and flare-up volatility in equity markets for the coming week, experts said on Saturday.
"The upcoming US rate hike decision will make both the markets extremely volatile," Anindya Banerjee, associate vice president for currency derivatives with Kotak Securities, told IANS
"This might further deplete the foreign reserves, as the reserve bank will try to arrest the fall in rupee`s value. This was also one of the prime reasons for the USD 2.88 billion depletion in the reserve value (for the week ended September 4)."
According to the Reserve Bank of India`s (RBI), weekly statistical supplement, the foreign reserves for the week ended September 4 declined by USD 2.88 billion and stood at USD 349.03 billion.
The reserves had plunged by USD 3.43 billion to USD 351.92 billion in the previous week ended August 28.
"The RBI is certainly trying to defend the rupee. It has been very aggressive and active in selling dollars to defend the rupee," Hiren Sharma, senior vice president, currency advisory at Anand Rathi Financial Services, told IANS.
"Other major reason for the depletion in reserves was the outflow of foreign funds from equities markets due to the anxiety over the upcoming US rate hike decision."
Major fund outflows are taking place due to the global economic uncertainty and heightened chances of the US Fed to raise interest rates after a decade or so of easy monetary regime with interest rates pegged at near zero levels.
The US Fed will decided on whether or not to raise interest rates in its Federal Open Market Committee (FOMC) slated for September 16-17.
High interest rates in the US are expected to lead away the foreign portfolio investors (FPIs) from emerging markets like India. It is also expected to dent business margins as access to capital from the US will become expensive.
It is estimated that the foreign funds and investors have sold around USD 3 billion since August.
The reserves were also depleted on account of strengthening dollar value against major currencies.
"The dollar appreciated by 1.00 percent against the major non-dollar currencies in the week under review. This has also had a negative impact on the reserves," Banerjee said.
"The dollar is strengthening on the back of expectation of a rate hike and subsequent bearish sentiments."
The Indian reserves consists of nearly 20-25 percent of the non-dollar currencies. The individual movements of these currencies against the dollar impacts the overall reserve value.
The data furnished by the RBI showed that the foreign currency assets (FCAs) receded by USD 2.65 billion to USD 325.65 billion.
During the week under review, the country`s gold reserves also depleted by USD 214.8 million at USD 18.03 billion.
The plunge in bullion reserve comes as the dollar as a competing alternative is gaining strength.
The special drawing rights (SDRs) in the period under review were lower by USD 18.6 million at USD 4.04 billion.
The country`s reserve position with the International Monetary Fund (IMF) slipped by USD 5.9 million to USD 1.28 billion.
For the next week, analysts fear a flare-up in volatility both in rupee and the equities markets.
"Volatility will persist until the FOMC decision becomes clears. More important is the language that the Fed is going to use. A dovish one will support a recovery in rupee and equities. This could be a sustaining recovery," Banerjee elaborated.
"The recovery can be as strong as taking rupee to 64-levels. However, a hawkish outlook will heighten the chances of a rate hike in December."
On the other hand, Sharma believed that a rate cut by the RBI in its monetary policy meet scheduled on September 29 will help both the rupee and the equities markets.
"If the Fed maintains its monetary policy and the RBI cuts rates to strengthen growth, then we can see a positive effect on both the rupee and the equities markets," Sharma contended.
