Rupee breaches 65/$; poll shows it may not breach 66

Indian currency has fallen 1.9% in past three trading sessions

The rupee could weaken further against the dollar but is unlikely to cross the 66-a-dollar mark, according to a poll conducted by Business Standard. The median forecast of 10 experts showed the rupee at 65.40/dollar a month down the line. Only two respondents said the rupee would breach 66/dollar.

The rupee has come under pressure amid volatility in global markets, with investors moving away from riskier assets after China started devaluing its currency for two successive days. In the past three trading sessions, the rupee has fallen 1.9 per cent, closing at 65.11/$ on Thursday.

“The overall currency devaluation is being triggered by the Chinese yuan. That will continue to keep the rupee weaker. To be competitive, the Reserve Bank of India (RBI) will not be too uncomfortable with the rupee at 65-65.50 a dollar,” said Anindya Banerjee, currency analyst at Kotak Securities.

On Thursday, China devalued its currency by another 1.1 per cent to the dollar, bringing the total devaluation to 4.4 per cent in three days, the biggest drop in decades. The move was triggered by weak export data for July and there is speculation Beijing’s action will trigger a currency war.

Aditya Puri, managing director, HDFC Bank, said, “I don’t know where the rupee is headed. But what China is doing is very dangerous and unpredictable. It has devalued the yuan twice in two days. Unless something is done, it will lead to competitive devaluation. I think either competitive devaluation or duty on China globally is a distinct possibility.”

RBI has not been aggressive is defending the rupee, though it is in a better position compared to the currency crisis the country faced two years ago.

The country’s foreign exchange reserves have swelled from $274 billion in September 2013 to about $350 billion now, which has resulted in the import cover moving up from seven months to nine months.

Since May 2013, the rupee has been among the best performing currencies.

While easing energy prices, robust foreign direct investment and a longer period of easy global monetary policy were welcome news for India, the rupee had to weaken to stave off prospects of further cheap imports from China and elsewhere, experts said.

“A gentle depreciation in the rupee would be welcome news for India. Given global foreign exchange moves, this will help bring the real effective exchange rate of the rupee to more reasonable levels from the 11 per cent overvaluation today. We still have large levels of unhedged foreign currency exposures. Hopefully, further monetary policy easing in India will help address this,” said Ananth Narayan, regional head (financial markets), South Asia, Standard Chartered.

A section of market participants sees the possibility of the Indian currency strengthening once the current volatility wears off.

“The rupee will move to 64.5 a dollar in a fortnight to a month. In September and beyond, the price trends for the rupee would be influenced by US Federal Reserve action: if it decides to keep policy rates unchanged, the rupee will only appreciate further,” said N S Venkatesh, executive director and head of treasury, IDBI Bank.