...

it is all about sentiments – the real cause behind fall in Rupee

Just look at the following statements that have appeared so many times in news papers, magazines,
television etc:

...........................“Major cause for falling Rupee is outflow of US dollars”

......................“FIIs selling in equity markets pulling Rupee further down”
..........................................................“Dollar flying out – Rupee tumbles”

Now take a look at the real data Figures in US $ million

in the table. Yes, it is correct that Increase Net flow with

Net Investment by FIIs decrease over respect to Exchange Rate
the FIIs are selling in the equity previous period previous
period
(Rs / US $)

markets but simultaneously they As on Debt Equity Debt Equity

March' 06 151 45108
are also investing more in the March' 07 1384 50582 1233 5474 6707 43.44
Dec' 07 3625 66329 2241 15747 17988 39.44
debt markets. The net outflow of Jan' 08 4110 63098 485 -3231 -2746 39.39
March' 08 4511 63495 401 397 798 39.90
US $ on account of FIIs have been April' 08 4089 63761 -422 266 -156 40.38
May' 08 4048 62519 -41 -1242 -1283 42.53
around US $ 820 million in June' 08 3801 60016 -247 -2503 -2750 42.85
July'08 4698 59561 897 -455 442 42.47
rd
September’ 08 (till 23 ). Compare August' 08 5010 59261 312 -300 12 43.92
Sept 23, 2008 5756 57695 746 -1566 -820 45.39
this to the net outflow in May Source - FII data - Sebi website & exchange Rates - http://www.oanda.com/convert/fxhistory (Interbank rates)
and June’ 08, the net outflow in May’08 was US $ 1283 million and in June was a whopping US $
2750 million. The exchange rate was then at Rs 43/dollar levels and continued at those levels till
August ’08 then why suddenly in September’ 08 the Rupee has dropped so much. How can we forget
the bloodbath in Indian stock markets in January’08 when the markets fell heavily after reaching all
time highs, the main cause of this fall in the stock market was also heavy selling by FIIs and then the
net outgo of US dollars on account of FIIs was US $ 2746 million but Rupee stood straight against
Dollar at around 39.40 levels for quite some time even after that.

So.......the MAIN reason is not FIIs selling...it is just negative sentiments.... everyone talking about
FIIs selling, Dollar flying out, subprime crisis, fallout of Lehman etc. and the weak sentiments cause a
panic in the markets which is the real cause of this outflow.

Disclaimer:

The views expressed in the article are the author’s personal views.

About author:

Naresh Goyal and he may be contacted at goyal_naresh@yahoo.com.