The recent sharp movement in the rupee-dollar exchange rate has come as a surprise to many importers, who were of the view that the local currency would continue to strengthen.
The recent level of Rs 63 a dollar could be a thing of the past, revealed a poll of 10 currency treasurers, bankers and economists by Business Standard on the possible exchange rate by the end of December 2017 and March 2018. All except one in the poll expected the rupee to depreciate slightly, as chances of rapid depreciation are no longer there, with carefully calibrated and well-communicated policy measures being undertaken by the US Federal Reserve.
But, even as the Reserve Bank of India (RBI) built a record $402-billion reserve, aided by a continuous flow of dollars in the local market, the rupee slipped sharply in two trading sessions. This was because of the largely expected sound bites from the US Fed that a rate cut was likely to happen by December and that it would finally start unwinding its quantitative easing by not rolling over $10 billion a month of its assets. Foreign investors dumped emerging market stocks and bonds, including those of India, as the dollar gained against all major currencies.
Following other emerging markets and Asian currencies, the rupee depreciated to 65.09 a dollar in intra-day trade on Friday, from 64.08 only a week ago, negating any belief that the rupee was rising on its own strength. The crux of the matter remains that India’s exchange rate is still determined by how much portfolio comes into the local assets.
Illustration: Ajay Mohanty
“The rupee was and is still fundamentally overvalued. However, global liquidity led to significant capital inflow into emerging markets, including India, and that led to rupee appreciation,” said Samir Lodha, managing director (MD), QuantArt Market Solutions, a risk management firm.
“The trend of the rupee strength has changed at least for some time now,” said Abhishek Goenka, MD, IFA Global, a currency consultant. Goenka, like most in the survey, doesn’t see the rupee depreciating beyond 66 a dollar by December.
“The rupee could be maintaining its depreciating trend on account of outflows from emerging markets on concerns of fiscal deficit and slowing growth. Importers should maintain to cover their exposures in any major dips and exporters should book long-term above 65,” Goenka said. Having said that, currency dealers and economists do not see the rupee sliding rapidly anytime soon. After all, India’s healthy foreign exchange reserve would ensure a free fall in the local currency could be checked for a long time, and to be fair, foreign investors have just pared some of their holdings.
“The rupee may depreciate to 66-67 a dollar level in the next six months, given the undercurrents in external sector. However, the pace of depreciation should be orderly given our forex reserves buffer,” said Rupa Rege Nitsure, group chief economist, L&T Financial Services.
Investors are still bullish on Indian assets and the dollar will continue to come into the markets but net flows could slow down, say experts. “It all depends on what Janet Yellen does,” said a foreign bank treasurer, who declined to give his view on the rupee. “If US interest rates rise, there will be selling off of emerging market assets, and the rupee will be under pressure,” said the treasurer. However, he doesn’t see panic selling of the Indian currency.
Beside the US Fed, other factors are also poised to push up the greenback. The geopolitical tension between North Korea and the United States, and crude oil prices crossing $55 a barrel are two major factors.
In India, the government’s proposed fiscal push, a widening current account deficit and shrinking scope of foreign investors to invest in local bonds are major contributing factors in pulling down the rupee.
According to bond market dealers, some invested in rupee bonds and kept their positions unhedged, expecting the local currency to appreciate. In the past week, these players might have liquidated their holdings as the rupee depreciated. Currency dealers say importers, who for a long time were not hedging their exposures, have started doing so.