The rupee could weaken past the 67 a dollar mark, a level last seen during the currency crisis of 2013, after depreciating 2.15 per cent in November. Concern that the U.S. Federal Reserve’s anticipated start of interest rate increases in December could help the greenback strengthen against all major currencies has weighed on the rupee as well.
“Indian rupee’s relative outperformance against its EM peers may not sustain in 2016 and beyond,” Deutsche Bank wrote in a note to its clients. “The current account deficit may well have bottomed and the supportive flows environment is unlikely to improve further.” The rupee’s depreciation in November was the most since August, when it fell 3.66 per cent against the dollar.
Risks stemming from a further rally of the dollar around Fed policy normalization, rising dollar funding costs, tightening liquidity, and possible depreciation of China’s Renminbi are not adequately priced into the present value of the rupee, according to the Deutsche Bank report
“Shift of the rupee to a 68-70 range to the dollar is therefore plausible if some of these risks materialize. In the absence of these risks, the rupee will be range bound around 66-68, in our view,” it said.
The Indian currency last breached the 67-dollar mark two years back during the currency crisis when it hit its record low of 68.25 on August 28, 2013. Since then, following a series of steps by the central bank and the government, including restrictions on the import of non-essential items and steps to attract foreign fund flows, the currency had stabilised. The central bank has built up its foreign exchange reserves, more than $75 billion in two years, which are sufficient to meet about nine months of imports.
“The Indian rupee is feeling the heat of the rally in the dollar index and has brushed with its two-year lows against the dollar, witnessing losses of around 5.76 per cent year-to-date,” said Sugandha Sachdeva, currency strategist at Religare Securities. Markets are factoring in the first rate hike in almost a decade by the U.S Fed in its upcoming December meeting, which is hurting emerging market currencies, Mr. Sachdeva said. The rupee opened weaker on Monday, at 66.84 a dollar and went on to touch a low of 66.87, before recovering to end at 66.67 a dollar compared with Friday’s close of 66.76.
Rating agency India Ratings said though the rupee faces pressure in the near term, a healthy recovery was also expected.
“For the week, dollar-rupee pair may briefly touch the 67/dollar mark before reversing and end the week stronger at 66.30,” according to India Ratings. The rupee could get support if some crucial economic reforms, including GST, get parliamentary approval.
