Rupee second worst performing emerging markets currency; down 14 per cent against dollar .

MUMBAI: The Indian rupee was the second worst performer among the currencies of emerging markets in 2013, falling almost 14% against the dollar.

The US Federal Reserve's hint at tapering of bond purchases in May resulted in significant capital outflows from most Asian and BRIC countries, leading to a sharp fall in their currencies. The fall was mainly in those economies running a current account deficit (CAD), which is excess of spending overseas than earnings, as Chinese yuan and South Korean won bucked the trend due to surplus.

Although the rupee gained almost 10% in the first few months of the year, it lost nearly 14% in the following months touching a low of 68.85 to a dollar in late August as the government struggled to contain its high current account deficit.

After widening to 4.9% of GDP in the quarter to June, the CAD narrowed to 1.2% in the following quarter as duty and restrictions on gold imports led to a fall in the import of precious metal. The CAD in 2012-13 was 4.3%.

Capital flows worsened during the year with foreign investors pulling out $6.6 billion from Indian debt. There was also redemption pressure of short-term borrowings.

Both capital and trade flows, however, improved after the quarter to June. The trade deficit narrowed as gold imports slowed and there was a modest pick up in exports as well.

Experts say the rupee may emerge stronger in 2014 on account of higher capital flows, which will help in bridging the CAD.

"Overall, we maintain our FY14/FY15 CAD estimates at 2.7% of GDP," said Rohini Malkani, chief India economist at Citigroup.

Besides, the capital account and the overall balance of payments position are going to be better next year as there will be a cushion of $34 billion of reserves on account of RBI's special swap window for banks and NRI deposits. "There will be pressure on emerging markets' currency as the Fed continues taper in 2014," said SK Ghosh, chief economic advisor at State Bank of India. "However, India's advantage will be a cushion of the additional $34 billion, which will help us handle the impact of the taper."

Source : economictimes.indiatimes.com