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Brexit and related uncertainties could stoke a heightened volatility in the currency market and the Reserve Bank of India (RBI) can be expected to intervene, multiple times a day if needed, say currency dealers.
The market consensus is that the rupee is unlikely to cross 69 a dollar. Most probably, it would trade between 67.5 and 68.8 in this week.
Going by the initial reaction of the rupee in the Brexit aftermath, it is unlikely to be in a free-fall. However, some depreciation would be needed to maintain competitiveness, at a time when other Asian currencies are falling more. While the rupee fell one per cent on Friday, in response to Britain choosing to leave the European Union,the South Korean won fell about 2.5 per cent.Pramit Brahmbhatt, head of Veracity Financial Services, sees rupee trading in a range of 67.5 and 68.5 a dollar this week.
The volatility related only to Brexit, the rupee should not cross 69 a dollar, said Harihar Krishnamurthy, head of treasury at First Rand Bank. There will be some unpredictability, though as a risk-off stance in markets strengthens the dollar and weakens emerging market currencies. “Contagion possibilities of Brexit could fan weakness. However, weak commodity and crude oil prices, and high gold prices would provide a buffer. Large forex reserves and a low current account deficit (CAD) at one per cent( of gross domestic product) would also cap the rupee fall to around 69,” he said.
Technical charts show the rupee’s crucial resistance level at 68.2 a dollar. If that crosses, rupee can go up to 68.8, said Abhishek Goenka, managing director of IFA Global, a currency consultant. Piyush Wadhwa, IDFC Bank’s senior director and head of financial markets Piyush Wadhwa, also sees rupee to trade in the range of 67.5 to 68.8 in the short term.
On Friday, in fact RBI intervened at 68.2. The local currency strengthened back to close at 67.97 , down 1.1 per cent from its previous close but strengthened 1.9 per cent against the euro and gained 7.5 per cent against the pound .
RBI's foreign exchange reserves, at a record $363 billion gives the central bank enough ammunition to intervene. So, the market is not very concerned. "There is no panic ," said Goenka of IFA Global.
Bonds, meanwhile will show far more resilience. In fact, as a response to Brexit, the ten year bond yield in India fell two basis points. Bond yields fall as prices rise. One basis point is a hundredth of a percentage point.
“Bond markets would take comfort from good rupee liquidity, as well as the RBI stance to keep liquidity available through OMOs (open market operations) and repos. Liquidity infusion by Bank of England and the European Central Bank, and onset of the monsoon would also be supportive. The only risk is if inflation edges up and foreign investors sell bonds.The 10-year yield closed at 7.47 per cent on Friday. Here again, 10 year benchmark is seen capped at 7.6 per cent,” Krishnamurthy said.
