US Fed's hawkish stance won't affect rupee much

Despite the US Federal Reserve’s hawkish language, it is felt the rupee will trade at 60-62/dollar through the next few months. Narrowing of India’s current account deficit (CAD), lower inflation, comfortable foreign exchange reserves and hopes of a sovereign rating upgrade are seen as aiding the currency.

In quarterly economic and interest rate projections by the US Fed, it suggested a quicker pace of rate increases than envisioned in previous projections. In a statement after a two-day meeting, the Fed announced a $10-billion cut in its monthly bond purchases to $15 billion.

“The US Fed has actually outlined key measures it plans to take in moving from a loose to a more normal monetary policy. This comes as big relief for markets. With rating agencies to soon conclude their review, there are hopes the outlook on India will be upgraded. That will help attract flows to India,” said Anindya Banerjee, currency analyst at Kotak Securities.

Experts believe for India, the worst is past (the rupee had touched an all-time low of 68.85 a dollar during intra-day trade on August 28, 2013). “In the near term, the rupee will move between 60 and 62 a dollar and in the medium term, there will be gradual depreciation. A gradual depreciation in the rupee is warranted; else, exports will become uncompetitive. A depreciation of four-five per cent a year is desirable, with the current inflation and interest rate differentials,” said Ashutosh Khajuria, president (treasury), Federal Bank.

On Thursday, the rupee ended at 60.85 a dollar, compared with the previous close of 60.92. It opened at 61.11 and, during intra-day trade, touched a near one-month low of 61.2.

“The Street had expected a reduction in the bond-purchases programme, not interest rate projections. Due to this, the rupee depreciated in early trade. But later in the day, custodian banks were selling dollars. Also, there was intervention by the central bank and exporters were selling dollars,” said Sandeep Gonsalves, forex consultant and dealer, Mecklai & Mecklai.

For the quarter ended June, India’s CAD narrowed sharply to 1.7 per cent of gross domestic product ($7.8 billion) from 4.8 per cent ($21.8 billion) in the corresponding period last year.  Besides, the Reserve Bank of India (RBI) is committed to building foreign exchange reserves to prepare the country for times of uncertainty. RBI data showed during the week ended September 5, reserves stood at $317.31 billion.