I received a congratulatory email a couple of weeks ago from someone who reads my columns and with whom I occasionally correspond. He reminded me that in an article published in January, I had forecast that the rupee would range between 47 and 57 against the dollar this year, and that, with the year nearly half done, my forecast was still holding.
His big question was: will this range hold for the rest of the year?
First off, it is clear that the rupee is breathing a little bit easier than it was a couple of weeks ago. Calls for 60 and worse from the talking heads on television have largely moderated. Indeed, rupee bearishness first started showing signs of exhaustion as far back as May 23, when it first broke below 55. It fell a bit more, then recovered, and by now (June 6), the rupee has been the third best performer (of 28 currencies we track) on a week-on-week basis — even though it was only 12th best month-on-month, and third worst year-on-year!
Clearly, the flurry of notifications from the RBI tightening any and all speculative windows, in tandem with its on-again off-again intervention, has worked – to some extent at least – and the rupee appears to have built a floor at 56.50.
Thus, 57 could well hold.
So, what about 47?
When I first started thinking about this, I realised that I was perhaps (as I frequently am) in a majority of one in even thinking such extravagance. The good – though a bit disappointing – news is that I am beginning to hear similar tunes in the market. The April trade figures and the sharp decline in oil prices point the way.
Exports and imports both grew very modestly in April (two to three per cent), throwing up a trade deficit of only around $13 billion (Rs 72,000 crore). The commerce minister is pitching 20 per cent export growth, banking on the new package of sops and a substantially weaker rupee. And given that central banks appear ready to continue to stimulate, global growth may not be as bad as expected, so we may get at least close to that target.
On the other side, our imports will certainly grow at a slower pace than last year. First of all, our GDP growth will be lower, at least in the first half, and, critically, oil prices are down sharply — nearly 20 per cent from the April average, 30 per cent from the 2012 highs and 15 per cent from the average in 2011-12. Citigroup has estimated that each $1 decline in the oil price reduces our current account deficit by $900 million (Rs 5,000 crore).
Thus, it is possible that the current account deficit for 2012-13 may be as much as $25 billion (Rs 1.3 lakh crore) lower than it was in 2011-12. With the tweaks made to NRI deposit rates, and assuming the RBI opens the debt window much, much wider, the current account deficit could turn out to be much easier to finance. This understanding is already filtering into the market.
Of course, to really create momentum – remember we’re thinking 47 here – the risk-off mood would have to come back strongly. The positives are that the risk of further fumbling by our government is by now quite low — indeed, with the huge amount of bad news already on the table, it would take very little positive news to actually improve sentiment. And, as mentioned earlier, global central banks, still feeling the wall at their backs, are ready for some more widespread monetary easing.
The negative, of course, is Europe, where they are now talking “fiscal union”. Together with the growing recognition that the Greek electorate will step back from the abyss of the New Drachma on June 17, this is giving the euro some comfort. Technicals and the highly oversold market could result in a serious correction over the next four to six weeks, which would also favour the rupee.
However, in the medium term, there is more trauma on the cards. All this talk of fiscal union is another desperate attempt by European politicians to avoid the reality that the euro can’t hold. Italians are Italians, Germans are Germans, Greeks are Greeks and the French, for damn sure, are French. No country would give up fiscal sovereignty unless, say, it lost a war. Fiscal union, even if they are able to get it going, would be hell to put together – think referendums and treaties – and, in any case, would unravel even before it takes shape.
On balance, 47 looks tricky, but, as ever, volatility is assured and there is certainly some sequencing of circumstances that can result in my 47 to 57 forecast holding for all of 2012.