Why rupee is unlikely to hit 60 levels against the US dollar

UBS expects the rupee to remain range-bound between 62-66 levels over the next few months

Though the rupee saw its sharpest fall in a day since July 3 of 24 paise to hit 64.08 against the US dollar (USD) on Thursday, the Indian unit is in no hurry to breach 60 levels in the near term, suggests the latest report by Tanvee Gupta Jain, an economist with UBS.

Going ahead, Jain expects the rupee (USD/INR) to remain range-bound between 62-66 levels over the next few months and average 64.3 in FY18 and 65.4 in FY19. UBS had earlier estimated it to hover around 65.4 and 67.6 levels, respectively.

The USD/INR pair has been among the better-performing currencies in emerging markets, appreciating 5.9% thus far in calendar year 2017 (CY17). On Thursday, however, the Indian unit lost ground on reports of escalating India's geopolitical tension with China amid developments relating to North Korea and the US.

 

“Rupee came under pressure against the US dollar and fell to the lowest level in a week after geopolitical tensions weighed on domestic as well as global equities. Asian currencies also weakened against the US dollar on weak global sentiment,” says Gaurang Somaiya, research analyst (currency) at Motilal Oswal.

“Weakness in domestic equities could continue in Friday's session and that could further weigh on the rupee. On the domestic front, market participants will be keeping an eye on industrial production (IIP) data and slower-than-expected growth could keep the rupee under pressure. For the day, the USD/INR pair is expected to quote in the range of 64.00 and 64.45,” Somaiya adds.

Thus far in 2017, UBS says, supportive external environment (FII debt flow touched $18 billion in CY17 to date), a strong state election result (Uttar Pradesh), ongoing reforms and external stability have supported the rupee. Broad weakening of the USD on a year-to-date (YTD) basis has also helped.

Going ahead, UBS believes, there are few triggers for a sharp rally from its current level. For one, the debt inflow is likely to become much slower (G-Sec limits are almost fully utilised and will be raised $1.25 billion in October), while equity flow is likely to be constrained by elevated growth expectations.

That said, UBS believes believe pursuing structural reform by policymakers could help further strengthen the rupee from its current level. 

"The most critical reform that we will watch for includes resolution of stressed assets in the banking system, GST progress and easing supply-side bottlenecks to help turn around the investment cycle," UBS says.

The overall risks to India's external position have also reduced over the years, UBS feels. Narrowing of the current account deficit to 0.7% of GDP in FY17 as compared to 4.8% in FY13, stable foreign direct investment (FDI) and forex reserves of $393 billion in July 2017 are the other factors UBS cites that provide adequate cushion to the rupee against the volatility due to global risk aversion.