Rupee may come under pressure as economy shows signs of stress: Experts

Rupee has already lost little more than 2% against the dollar since the beginning of the year

Pressure is building up on rupee as domestic economy shows signs of stress at a time when the US economy is on its path to recovery. 

The recent ban on buyer’s credit instruments such as letters of undertaking (LoUs) is also expected to put pressure on the exchange rate in about a month’s time. Already before the recent ban by the Reserve Bank of India (RBI), banks had gone slow on issuing the instruments. But now, currency market observers say, importers could be crowding the market with a dollar demand of about $10-12 billion, and this should weaken rupee.

“A correction in currency is long due and can happen anytime. The domestic hygiene factors around rupee have worsened. We have wider current account deficit, wide trade deficit and domestic banks are in bad shape and oil prices are rising. The dollar also can rebound anytime as US interest rates are rising and tax repatriation is taking place there. This is a ground for money going back to the US,” said Samir Lodha, managing director (MD) of QuantArt Markets Solution, a corporate treasury consultant.

The current account deficit widened in the December quarter to $13.5 billion, or 2.2 per cent of gross domestic product (GDP), from $7.2 billion, or 1.2 per cent of GDP in September, data released by the Reserve Bank of India on Friday showed. Trade deficit in the 11 months to February widened to $143 billion, against $120 billion in the same period a year ago.

The rupee has already lost little more than 2 per cent against the dollar since the beginning of the year, it should depreciate another 3 per cent in the next five-six months, said Abhishek Goenka, MD of IFA Global, a currency consultant. Rupee may fall to 67 a dollar level in normal course of event, Goenka said, but much depends upon how the US economy behaves. 

Source: Bloomberg

The rupee closed at 65.2 a dollar on Monday. It started the calendar year at 63.7 a dollar level. 

The dollar has been holding on to its weakness for quite some time. The dollar index, which measures US dollar’s strength against other major currencies, is still below 90. But it could be anytime that the index starts inching up. That would be bad news for emerging market economies, including India. 

“There are chances of black swan event such as domestic political scenario turning volatile ahead of the general election and US dollar suddenly gaining strength. If that happens, there will be carry trade unwinding,” said Goenka.

While Lodha sees chances of rupee heading to 68-69 a dollar, Goenka said rupee should get a resistance at around 67 a dollar level. Beyond this there could be a panic in the market.

Hedging discipline is still not mature among Indian corporates. While it could be natural to expect exporters to have stopped hedging expecting rupee to depreciate, importers are also not hedging beyond two-three months.

“Many importers are unhedged. The corporate view is that rupee will remain stable, whereas the signs are clearly pointing otherwise,” said Lodha.