After a protracted period of carry dominated low volatility, USD/INR sprang to life in the last fortnight, breaking through the crucial resistance of 65.35. The depreciation since has been steep, making Rupee one of the worst performing currencies amongst emerging markets (EMs).
Much of this up move was on the back of domestic factors. With broad based USD turnaround also looking likely, macros and technicals are stacked against the Rupee. Oil prices, too, will remain upbeat on Iran sanctions putting pressure on the Indian unit.
The current bout of Rupee weakness does not just seem like a passing phase. The inflation dynamics have changed. India is vulnerable to rising crude prices. The OPEC members have complied with their respective production quotas and inventories have shown marked drawdown. Our exports have not picked up in line with the strength in the global economy.
The recent trade deficit on a seasonally adjusted basis was higher than $15 billion. At this rate, the current account deficit for FY19 is likely to be around $80-90 billion. While this is significantly higher than $20-30 billion seen in recent years, there are concerns over whether the capital inflows would continue that could fund this CAD.
FDI inflows too seem to be waning. Lack of confidence in the RBI policy due to recent flip-flops has seen FPIs withdraw $2 billion from the debt markets in just a few sessions. With US rates too heading higher, the capital account flows in FY19 are not expected to be anywhere close to what we have seen in recent times.
The spread between offshore and onshore forward points was at its widest in recent times (8-9p) indicating massive unwinding of offshore carry positions. Three-month carry-to-volume ratio has declined significantly but not as much as is usually seen in times of panic, which indicates there could be further strain on the Rupee.
The breach of 65.35, I feel, was a significant breakout. The first major resistance that the market was seeing was 66.65-70 (from where the Rupee had gapped down post the UP election results). With that break, there is almost no technical level in sight till the previous high of 68.90. Further higher degree wave will finish its final leg around 70.00 mark.
Seasonality chart of Rupee also validate the quote: “Sell in May and Go Away”. Out of past 10 years, the Rupee was seen depreciating for eight times at an average rate of 1.73%. June too has historically been a weak month for Rupee and a rewarding month for USD bulls.
The author is CEO of IFA Global