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66 against the USD? Rupee to depreciate but not in a hurry: BS poll

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

Anup Roy  |  Mumbai 

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The recent sharp movement in the rupee-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 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 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.

Rupee to depreciate but not in a hurry: BS poll

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 slipped sharply in two trading sessions. This was because of the largely expected sound bites from the US 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 gained against all major currencies.

Following other emerging and Asian currencies, the depreciated to 65.09 a in intra-day trade on Friday, from 64.08 only a week ago, negating any belief that the 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
Illustration: Ajay Mohanty

“The was and is still fundamentally overvalued. However, global liquidity led to significant capital inflow into emerging markets, including India, and that led to appreciation,” said Samir Lodha, managing director (MD), QuantArt Market Solutions, a risk management firm.

“The trend of the 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 depreciating beyond 66 a by December.

“The could be maintaining its depreciating trend on account of outflows from emerging 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 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 may depreciate to 66-67 a 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 will continue to come into the but net flows could slow down, say experts. “It all depends on what does,” said a foreign bank treasurer, who declined to give his view on the “If US interest rates rise, there will be selling off of emerging market assets, and the 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 The geopolitical tension between and the United States, and 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

According to bond market dealers, some invested in 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 depreciated. Currency dealers say importers, who for a long time were not hedging their exposures, have started doing so. 

First Published: Mon, September 25 2017. 08:54 IST
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