Outflows may weaken currency

Fund outflows owing to weak performance of equity markets may see the rupee depreciate in the near term, but other factors like high interest rates and easing crude oil prices will support it in the medium term.

The rupee is expected to depreciate further when markets open this week. “The rupee may lose some value as the Indian equity markets react to the global cues on Monday,” said Sandeep Gonsalves, forex consultant and dealer at Mecklai & Mecklai. He added that dollar demand from oil importing companies would continue to weigh heavy on the rupee, as they rushed to pay their dues to Iran. These are around $5 billion, against which oil companies are making initial payments.

On Friday, the rupee closed at 44.74, with a weekly loss of 1.26 per cent. This is the biggest weekly loss in three months. But, going forward, it may hold around 45 against the greenback on a number of factors. “India’s intact growth story, interest rate differentials as compared to other economies and the possibility of further easing in crude oil prices will work in favour of the rupee and can offset the negative impact of FII outflows, which may not be very damaging in the first place,” said Gopal Bhattacharya, head of global markets, India, at Société Générale. The repo rate, at which banks borrow from the Reserve Bank of India, is at eight per cent.

India’s growth prospects will attract foreign investments, says Anjan Barua, deputy managing director of State Bank of India.

Dollar movements will be closely watched. “It may be bad news in the near term but the US is still the biggest economy and there are not too many geographies which look attractive just now. Over the next few months, if the US can put in place some concrete strategies to reduce debt, markets will be much less concerned,” said Bhattacharya. The index of the dollar against six major currencies closed at 74.72 on Friday. Also, its fate will depend on when and how Asian and European central banks intervene to safeguard their respective national currencies.