Falling Fortunes

Rupee breached an important mark of 69, which, coincidently, was its all-time low, on June 28’s trading session. The previous all-time intraday low for the rupee was 68.8 against US dollar which was hit on November 24, 2016. On YTD basis, Indian rupee has depreciated by around 8 per cent.

Several factors were at play such as rising crude oil prices, global uncertainties, outflows from Indian equity and debt markets, widening in India’s trade deficit on account of jump in oil imports to $0.4 billion in April’18; up 41.45 per cent from April’2017.

In the last RBI meeting on June 6, the MPC decided to increase interest rates by 25 bps for the first time in four years to 6.25 per cent in order to counter rising the inflation. Having said that, RBI maintained a neutral stance on the monetary policy and MPC estimated CPI in the range of 4.8-4.9 per cent in the first half of 2018 and 4.7 per cent in the second half.

Rupee shows no sign of retreat 

International factors too, have not been supportive for the domestic currency as US dollar index strengthened around 3.2 per cent YTD amidst robust economic data. Inflation in the US has consistently been above US FED’s target range of 2 percent in 2018. To compliment this strength in consumer inflation, the US have been able to add on an average of 191,000 jobs every month in 2018 (January 2018 - June 2018) as compared to 177,000 every month in the same period last year. On June 13, FOMC meeting, Federal Reserve decided to increase interest rates by 25 bps for the second time in 2018 citing their confidence in the US economy.

Recently, US has tried to pressurise India and other countries to stop oil imports from Iran by November or face sanctions from them, making it clear there would be no waivers for anyone. Iran is the third largest supplier of crude oil after Saudi Arabia and Iraq. Iran Crude Oil Production is at a current level of 4.469M bb/day for February, down from 4.474M bb/day for January.

Also, the ongoing trade tension between US-China has caused jitters in major Asian economies including India. US President Donald Trump had accused China of unfair trade practises in the past and are threatening to put new tariffs on as much as $450 billion of exports from China. The United States has so far announced 25 per cent tariffs on $50 billion worth of Chinese exports, the first wave of which will take effect on July 6. To counter attack these tariffs the second biggest economy in the world has vowed to retaliate. The scale of damage to Asian economies depends on how bad the trade war gets in future.

Meanwhile, Euro gained traction after political uncertainty in the region which was evident in the last few months eased out as a new government was formed in Italy with Gisueppe Conte being sworn in as the prime minister.

Optimism was building before the recently held ECB meeting on June 14  and market consensus was for two rate hikes in 2019, post the meeting it has fallen to one rate hike in 2019. Earlier during the year ECB had announced that it would wind up its economic stimulus programme by September which is pushed to December in its June meeting. Since the inception of the QE programme ECB has bought back ¤2 trillion of government bonds. The current rate of bond purchase is ¤30 billion per month which will be reduced to ¤15 billion per month from September onwards and finally rapping up the programme by December.

In the recently held EU summit on June 28-29, the main issue that has been affecting major EU nations was the immigration issue. Hence, this issue took centre stage at the summit and the prime minister of Italy from the Populist Party was consistently pressurising other EU members that the bloc has not been able to solve its illegal immigration issue.

However, numbers of immigrants arriving in Europe has fallen by 90 per cent since the start of 2015. In order to satisfy Italy’s desires, member states had agreed to send rescued migrants on EU territory to “control centres” across locations still to be decided and only in countries that would volunteer to take them.

Rupee likely to weaken further

Trending on the latest weakness in Indian rupee, has depreciated by almost 5 per cent in the last three months. Moreover, US FED’s forecast to raise interest rates two more times eyeing strength in the economy is likely to add strength to the US dollar. Also, US treasury yields have been near their 5 year high at ~ 3 per cent mark adding further strength to the US dollar.

Besides, if ECB fails to live up to the market expectations of a more hawkish stance in the coming meetings, this would again lead to strength in US dollar and in turn weakness in Indian rupee.

Meanwhile, rising crude oil prices on account of sanctions levied by US on Iranian oil and rising tensions between US and China is likely to send major jitters towards developing economies and in turn adding further pressure on Indian rupee going ahead.

The factors cited above are likely to take Rupee (CMP: 68.46) higher towards the 70 mark by the end of July.
The writer is Chief Analyst Non-Agro Commodities & Currency Angel Commodities Broking Pvt Ltd.