Good news indeed to see significant rebounds in the value of the Indian Rupee and the Sensex after the appointment of the new Governor. The currency move will have been accentuated by a nicely orchestrated piece of intervention, sensibly timed to make the most of a change in circumstances.
As I have emphasised before, intervention timed like this is effective because it backs up other factors that the market consider positive, and the first actions of this technocrat Governor have provided that boost.
The challenge now will be to `steady the ship`, and try not to resort to the conventional CB weaponry that clearly failed to work in the recent spectacular fall from grace of the Rupee; the introduction of capital controls, rising interest rates and flailing attempts to intervene have done confidence in the country no favours. History is littered with attempts to stem a tide of adverse speculation against a currency by doing just these things – I know, I was that man…..
Near term positive news then, but obviously this is not going to change sentiment in one fell swoop. What is needed is for the CB to remain a little aloof, and not react to the next selling spree – and it WILL happen – by intervening. The objective is to convince the market that the CB and government are embarking on a clearly defined medium term strategy to stabilise the country. Only then will confidence return. Doubts about the ability of the Government to be strong and pursue this path will be acute, because elections are due by May 2014, and let`s be kind and say that run ups to elections are not exactly peppered with evidence of medium term strategies being applied !
I wish them luck, vision – and a strong nerve.
