Rupee pushed down by global monetary uncertainty & high CAD

The rupee ended flat at 65.21 against the US dollar on Wednesday ahead of the US Federal Reserve’s policy meet outcome to be announced late evening. Participants widely expect an interest rate hike and are watching for cues of further tightening. While a 25 basis rate hike is factored in, the US Fed’s assessment of the economy’s growth and inflation trends will be keenly watched.

Anindya Banerjee, currency analyst at Kotak Securities said, “There was not much action today as yesterday’s intraday range was less than 10 paise and the market is awaiting the FOMC (Federal Open Market Committee of the US Federal Reserve Bank) decision tonight. The trend of the rupee this week will be dictated by the outcome of the Fed’s decision. If the Fed signals four rate hikes then we can see the rupee rally to 65.50 but if the Fed continues with its earlier stance of three rate hikes then the rupee can appreciate to 64.90.”

Positive bias

The rupee opened a tad lower at 65.2175 from its Tuesday’s closing of 65.20 at the Interbank Foreign Exchange (Forex) market and largely traded in a small range with a positive bias. It touched an intra-day low of 65.23 in late morning and a high of 65.19 before ending at 65.21, a loss of one paisa, or 0.02 per cent.

The rupee continues to face challenges from global monetary policy uncertainty and domestic developments such as high current account deficit, fiscal slippage and rising inflation. India needs capital inflows to fund its current account deficit which has more-than-doubled to 1.9 per cent of GDP in April-December versus 0.7 per cent the same period a year earlier.

The rupee has been depreciating with the Indian equities since the end of January. Coincidentally, both the rupee and the Bombay Sensex were the second worst performers in Asia ex Japan. As of March 19, the rupee had depreciated -2 per cent year to date against the US dollar while the Sensex has fallen more by 3.3 per cent year to date.

Foreign investors have pulled out

“The vulnerability of the exchange rate to the weak stock market is understandable… We expect the savings-investment gap to widen to 2-2.2 per cent of GDP in FY19 from a projected 1.8 per cent in the current FY ending March 2018. As of September 2017, India’s short-term external debt totalled 3.8 per cent of GDP. It did not help that Indian bonds had been under pressure since mid-2017, but this was due mostly to a wider fiscal deficit. Overall, India’s financing requirements will keep the rupee vulnerable to rising US rates this year, especially if they weigh on global equities. Our view remains for the rupee to depreciate towards 67 this year,” said Radhika Rao, India Economist at DBS Bank.

Tanvee Gupta Jain, economist at UBS Investment Bank, said, “Based on global/local macro, as well as analysis of India's external vulnerability, we expect the rupee (USD/INR) to remain range-bound (63-67) over the next few months. We estimate the rupee at 64 by end-FY19 and 65.5 by end-FY20. Even as we believe there is depreciation pressure on the rupee on rising external risks, it should be more than offset due to a weak US dollar. Our FX strategy team expects a weaker dollar despite a US fiscal impulse and higher yields. It remains bullish on the euro against the dollar and forecasts 1.30 by end-2018 and 1.35 by end-2019.”

A Nomura Research report said the rupee continues to face challenges from global monetary policy uncertainty and local idiosyncratic developments.

“We were leaning towards the view that concerns over the current account deficit, fiscal slippage and rising inflation were beginning to be priced in, but the risks around politics have turned less favourable for markets after the by-election losses in Uttar Pradesh (after a positive BJP showing in state elections in February),” the report said. It noted that although the main state election risks will be towards year-end – although the next focus will be Karnataka in May – politics could remain a near-term focus given the risk to fiscal policy and economic reform.

The Benchmark Sensex index rose 0.42 per cent or 139.42 points, to end at 33,136.18. The 10 ear G-Secs yields remained elevated with investors awaiting the US Federal Reserve monetary policy announcement and ended at 7.583 per cent compared to its previous close of 7.618 per cent.

According to NSDL data, from January to March 21, foreign investors have bought Rs 11,182 crore in equity and sold Rs 1,742 crore of government bonds and Rs 2 crore in hybrid funds.

Falaknaaz Syed