Weakness in rupee seen continuing in 2015

May touch 64/$ due to foreign flows slowing down

The weakness in the rupee is seen continuing into 2015, amid concern on slowing of foreign inflow.

However, the weakness is also seen as temporary, since the Reserve Bank of India (RBI) has been building strong foreign exchange reserves.

On Monday, the rupee weakened to a near 11-month low of 62.96 to the dollar, before closing the day at 62.95. On Friday it had closed at 62.30. It tracked steep losses in other emerging market currencies, as foreign investors started selling their portfolios, ahead of the end of the year. The rupee had ended at 63.10 to the dollar on January 27, 2014.

“There will be continued gentle depreciation. We must remember the dollar itself has strengthened against other currencies in a dramatic way. Given that, some depreciation of the rupee to protect the Real Effective Exchange Rate is warranted,” said Ananth Narayan, regional head, financial markets, South Asia, Standard Chartered Bank.

He said if foreign inflows were to get a bit slower, there'd be some mismatch as the former would not make up for the current account deficit. “This is my personal view, that the rupee could touch 64 somewhere in the middle of 2015,” he said.

Since the start of 2014, the rupee has weakened by almost two per cent. Many expect it to soon breach the 63-mark.

“We expect RBI to mount a full-barrelled defence to anchor expectations, at 65 per dollar, selling, say, up to $20 billion, if need be. Given the low import cover, the rupee has tended to fall below the previous low in each successive round of volatility. It dropped to 53 a dollar during the end-2011 European crisis. It fell further to 57 a dollar during the 2012 Greek crisis. It collapsed to 68 per dollar during the taper tantrum of 2013. Against this backdrop, (RBI Governor) Raghuram Rajan will not want to take chances with rupee expectations beyond 65 a dollar,” said Indranil Sen Gupta, the India economist at Bank of America Merrill Lynch, in a note to clients.

RBI's foreign exchange reserves fell $1.65 billion for the week ended December 5 to $314.66 bn. In the current calendar year, net flows from foreign institutional investors were $43.35 bn till December 12.

“While the near-term picture suggests it will be harder for the rupee to outperform, on the back of ongoing foreign exchange purchases by central banks, we do think this policy is prudent, given the increase in forex volatility we expect in 2015. RBI’s improved ability to curb topside volatility in the dollar-rupee will help the currency be more resilient to both global and local risks next year,” said HSBC in a note to clients on Monday.

RBI’s net dollar purchases from the market almost doubled in October to $2.7 bn, compared with $1.44 bn in September.

A few experts see the rupee touching the 64 mark in the first quarter of 2015 itself. “The possibility is there, due to strong US economic data. But those levels will not be sustained for a long time,” said Anindya Banerjee, currency analyst, Kotak Securities.