The rupee has already plunged under 70 to a dollar. How much more? The question is very relevant, now that the rupee has breached that psychological mark. Just a week ago, one thought the rupee would settle in the range of 68-69 a dollar; but the currency suddenly gravitated towards and then under 70. Curiously, the Reserve Bank of India (RBI) had mentioned in its last credit policy that trade wars were a major concern. But the concept of trade wars has assumed another dimension now, going beyond the US and China.
The present problem has been caused ostensibly due to the imbroglio in the diplomatic issues involving Turkey vis-à-vis USA. The fact is that the USA is using the concept of higher tariffs or ban on imports as a way of controlling not just economic but also political concerns. Hence, sanctions on Iran or the present disenchantment with Turkey (an American pastor is imprisoned in Turkey) has been settled on the basis of sanctions and tariffs. The fallout is also that these issues can snowball into something more serious as there could be threats to other countries to desist from dealing with the targeted nation, which in this case can be Turkey or Iran earlier. It is for this reason that the tensions can be long lasting and it will be difficult to guess when the issue will get resolved.
The market behaviour tends to get volatile as a collateral effect of such a phenomenon which can be felt across the world. This is the major reason why the rupee has been going down. Therefore, volatility is here to stay, at least for a while, and it will be hard to say when the normalcy will return. It could be a couple of trading sessions or a longer period of time. The way the market works is that the yo-yo movements continue as long as the ‘noise’ factor is there, and then it reverts to normal once the final call is taken – in this case, once US President Donald Trump takes his final action.
At present, the external situation based on fundamentals is satisfactory – the foreign portfolio investment (FPI) flows have started turning positive of late. Trade deficit has been widening, but it is not a major concern, as oil prices have stabilised. The US Federal Reserve’s future action is known, and there could be few surprises here. Also, the domestic economy seems to be on the move in the right direction, and the forex reserves, though declining, are fairly robust to cushion such shocks. Therefore, there should be few reasons for concern, and the rupee should revert to the 69 level finally.
However, the interim period will be volatile and it is here that the right sounds are heard from the RBI. It is not so much action in terms of supplying dollars which will not help right now, but ‘talking the market’ which is important to ensure that the speculators do not try and cash in on this situation and drive the rupee downwards. It will hence be interesting times for the market, and the holidays in between should provide some cushion.
The author is chief economist, CARE Ratings