Markets

Rupee likely to remain weak despite better economic indicators

The Indian currency breached the recent level of 64.30 and the rupee currently has depreciated below the psychological 65 a dollar mark and hit the low at 65.32 on last Friday.

The Indian currency breached the recent level of 64.30 and the rupee currently has depreciated below the psychological 65 a dollar mark and hit the low at 65.32 on last Friday.  

Lot of factors have contributed to the recent fall of the rupee against the dollar. The major reason has been the concerns about an imminent interest rate hike by the U.S. Fed after almost a decade which led the dollar index mounting to a high.

While talking to exporters in September 2013, P. Chidambaram, the then Finance Minster, had retorted that the right level of rupee would be between 59 and 60 a dollar and the “currency should not overshoot that level.” He made this statement exactly one month after the fall of rupee to its historical low of 68.93 on August 28, 2013. Since then, the rupee remained strong , for various reasons.   

With the unprecedented fall of rupee in 2013, the Indian currency turned out to be the worst performing currency amongst the other emerging market currencies on the back of policy logjam, sub-par growth regime, high inflationary pressures, soaring current account deficit (CAD) and the talk of tapering of bond buying programme of the U.S. Federal Reserve (U.S. Fed).

Slew of measures

However, there was a significant recovery in the domestic unit after the appointment of the new Reserve Bank of India (RBI) Governor Raghuram Rajan, as he introduced a slew of measures to control volatility in the Indian rupee, which curtailed further fall.

The rupee also got a boost after the formation of a BJP-led Government at the centre, which resulted in significant capital inflows to the equity as well as debt markets. This was a time when the rupee transformed itself from being one of the worst to one of the best performing currencies within a span of just 8 to 9 months compared to other emerging market currencies. The rupee held its ground thereafter.

Gradually, the country witnessed growth ticking slightly higher as the Government initiated a lot of reforms, which resulted in an upsurge in the domestic equities. The boom came in the form of considerable fall in crude oil prices in the global markets since June 2014, resulting in reduction in import bill, contained CAD and cooling off headline inflation.

It was the time the rupee was seen inching up to a level of 58.32 in May 2014, in spite of the fact that the U.S. Fed was on course to end its bond buying programme. The year 2014 was also witnessed significantly reduced volatility in the value of rupee as compared to the environment of 2013.

Steady depreciation

Since November-December 2014, the rupee again witnessed a steady depreciation, which set the tone for 2015 calendar year. Around this time, the world witnessed a gigantic fall in Russian rouble due to the cascading effect of fall in crude oil prices as Russian economy in a big way depends on crude oil exports.

Lot of factors have contributed to the recent fall of the rupee below 64.30 a dollar. The major reason has been the concerns about an imminent interest rate hike by the U.S. Fed after almost a decade which led the dollar index mounting to a high. The dollar index hit a 12-year high of 100.39 in March 2015.

Any hike in interest rate by the U.S. Fed either in September or most possibly in October this year would lead to investors fleeing away from emerging markets’ risky assets and lead to concerns about capital outflow.

Greece debt crisis

Another factor, which is still in the minds of investors, is the Greece debt crisis which led a flight to safety towards dollar index, thereby hurting the Indian rupee. More recently another add-on to the downward trajectory of the Indian rupee has been the decision by the People's Bank of China earlier this week to change the way it calculates the reference rate of yuan which led to more than four per cent fall in Chinese currency against the dollar. This also raised concerns about a full-fledged currency war and, in order to protect their trade, other emerging market economies devalued their currencies.

In tandem with that, the Indian currency also breached the recent level of 64.30 and the rupee currently has depreciated below the psychological 65 a dollar mark and hit the low at 65.32 on last Friday.

As of now, there is strong demand for dollar from banks for their importer-clients, which has resulted in rupee again depreciating to its near two-year lows. The market however, largely, ignored the better-than-expected Index of Industrial Production (IIP) data and a record low inflation number.

Chinese yuan

“The overall trend in rupee is likely to be skewed on the negative side as it has breached the key support of 64.30, which was guarding it for last three months. The precipitous fall witnessed recently has been triggered by Chinese yuan depreciation which has sparked concerns about capital outflows and the broad strength in Dollar Index. In near term, it may find major ground at the level of around 66 a dollar,” says Sugandha Sachdeva, AVP & In charge-Metals, Energy and Currency Research, Religare Securities Ltd.

According to her, “the situation for Indian rupee this year should not play out to be as bad as in 2013, in spite of the global headwinds as our macro-economic fundamentals are quite encouraging vis-a-vis the calendar year 2013. We have healthy foreign exchange reserves, low current account deficit, steady capital inflows, record low inflation and growth gradually inching higher. More so, the plunging commodity prices should act as a boon for the economy and underpin the local currency.”

Despite the bleak outlook for exports on account of factors such as the strengthening of the rupee on an REER basis and weak global demand, India’s current account deficit is expected to decline in 2015-16 from 1.3 per cent of GDP in 2014-15, led by benign commodity prices.

“Such improvements are likely to buffer the rupee and reduce the extent of volatility following global shocks, as compared to other emerging market currencies,” says Aditi Nayar, Senior Economist, ICRA.

Going forward, says Ms. Sachdeva, the domestic unit is likely to take cues from any rate cut by the RBI, which can boost the credit growth and the U.S. Fed’s stance towards interest rate hike in their September meeting.

Recommended for you
This article is closed for comments.
Please Email the Editor

Printable version | Aug 5, 2020 3:37:07 PM | https://www.thehindu.com/business/markets/rupee-likely-to-remain-weak-despite-better-economic-indicators/article7544533.ece

Next Story