Rupee outperforms Asian peers

Despite the recent weakness in the rupee by three per cent since the time China announced devaluation of the yuan, the depreciation has been less than ones witnessed by Russian ruble, Malaysian ringgit, Turkish lira and Taiwan dollar since August 10.

On Friday the rupee ended at 65.83 compared with the closing of 63.87 on August 10, a day before the Chinese yuan devaluation happened. “I believe the rupee will emerge as an outperformer in Asian currencies despite the temporary weakness that we have seen in recent times. Our current account deficit is pretty low, the fiscal deficit is under control, inflation is well managed and on top of that sufficient foreign exchange reserves have been built in the last 10-12 months,” said N S Venkatesh, executive director and head of treasury at IDBI Bank.

So far this month the rupee has depreciated by 2.63 per cent and since the start of 2015 the weakness has been 4.43 per cent. The rupee was trading near a level earlier seen  two years ago on September, 5, 2013. The currency had ended at 66.12 on September 5, 2013, due to concerns on the US Federal Reserve policy resorting to tapering. According to Venkatesh if in September 2015 the US Fed does not resort to rate hike automatically more money will start flowing into India.

The minutes of the US Fed meeting held in July shows they were almost ready to raise interest rates from near zero, where they have been at since late-2008. However, the US Fed added that inflation continues to resist those expectations.

“India’s Real Effective Exchange Rate or REER had appreciated in the recent past and thus needed to correct itself to maintain the competitiveness. Thus, RBI is unlikely to intervene in the currency market so long as to prevent a gradual and orderly depreciation bias of the rupee and unless the rupee witnesses sharp intra-day volatility,” said Indranil Pan, chief economist, IDFC in a note last week.

Meanwhile, there is some more weakness for the rupee in store as dollar demand from importers intensifies this week amid amid concerns that China may resort to further devaluation of the yuan. During the last week rupee weakened by 82 paise or 1.26 per cent to close at 65.83 per dollar on Friday. “This week the rupee may hit 66.25 per dollar as dollar demand from importers will be strong and China may decide to devalue their currency further,” said the head of treasury of a state-run bank. In fact currency dealers are of the view that the rupee would have touched 66 last week itself if RBI would not have intervened. RBI had been selling dollars through state-run banks in a bid to arrest the volatility. RBI’s foreign exchange reserves rose by $ 1.09 billion for the week ending August 14 to $ 354.43 billion, shows data released on Friday.