The rupee recovered smartly on Wednesday from the 15-month low reached a day before, as the Reserve Bank of India (RBI) stepped in with heavy dollar sales.
Besides, trade data for April, released after market hours on Tuesday, showed that non-oil imports fell and exports made a robust recovery, despite rising global crude oil prices.
At 1 pm, the rupee was trading at 67.84 a dollar, down from its previous close of 68.11, a level last seen in January 2017. Bond yields, though, remained stable at 7.89 per cent, compared with the previous close of 7.90 per cent.
Currency dealers said nationalised banks were heavy sellers of dollars since the opening of the market. The rupee had hit 68.1325 a dollar in the morning trade, but persistent dollar selling by nationalised banks strengthened it to as much as 67.75-a-dollar level. When the RBI intervenes in the market, it does so through a clutch of nationalised banks. The dollar index, which measures the greenback’s strength against major currencies, remained stable at 93.229 at the time of writing of this story.
Even as RBI chipped in on Wednesday, it was absent from the market on Tuesday, causing panic among traders. But that has dissipated now. “There is no panic at all, bonds have also stabilised. Exporters have slowly started selling in the markets at these levels,” said a senior currency dealer with a foreign bank.
But the bond market could come under pressure as analysts have started expecting a sharp hike in rates by the RBI in the coming days. "We now expect a total of 50-basis-point rate hikes in June and August, compared with our previous call of no change. The MPC is likely to shift its stance to ‘withdrawal of accommodation’ from ‘neutral’. We have revised FY19 (ending March-2019) CPI inflation forecast to 4.80 per cent from 4.45 per cent previously, on higher crude oil prices, a weaker rupee and a surprise uptick in core CPI in April," said Anubhuti Sahay, chief economist of Standard Chartered India.
Even as a split verdict in Karnataka election dampened sentiment on Tuesday, subsequent data for April showed that trade deficit increased marginally to $13.7 billion from $13.2 billion a year ago. The import of gold & precious stones and electronics goods showed a contraction, making up for the rise in crude oil prices.
“The deficit turned out to be the same as last year, even as the oil bill increased to $10.41 billion from $7 billion earlier. Exports rose about five per cent, aided by a weaker rupee. Therefore, there is a logic behind the rupee gaining strength today. The market is realising that the rupee’s depreciation is not a one-way street to doom; it aids export growth, as well as import contraction in some assets,” said Harihar Krishnamurthy, head of treasury at First Rand Bank.
Terming Tuesday’s rupee movement as knee-jerk, Krishnamurthy said the rupee had paused, and if it stayed this way for two-three trading sessions, exporters would start selling their dollars in huge numbers.
“It is a very good level for them to hedge at 67.80 a dollar and book a premium of about 4 per cent. They must have started realising that the rupee is not going to touch 70,” said Krishnamurthy. He expects the rupee to consolidate around 66.5-67 a dollar in the coming days.
Even as the rupee’s sudden loss on Tuesday gave a scare to the market, and indicated towards its record lows of 68.87 a dollar reached on August 2013, there is a difference in the fundamentals between then and now.
In 2013, fiscal deficit was at about 6 per cent of gross domestic product (GDP), whereas current account deficit (CAD) was close to 4.5 per cent. Now, the fiscal deficit is projected at 3.3 per cent, whereas the CAD is at 2.5 per cent.
Besides, the mobilisation of Rs 1 trillion in goods and services tax (GST) gave a confidence that the fiscal deficit target would be met, despite a spike in oil prices and the strengthening of the dollar, said bond market experts. Of course, rising crude oil prices do pose a continued challenge to the fiscal situation.
“The continued rise in the crude oil price in the ongoing month does not augur well for the upcoming print of the merchandise trade deficit,” said Aditi Nayar, principal economist at ICRA Ltd.
“Assuming an average price for the Indian crude oil basket at $70/barrel, we expect the net petroleum, crude and products import bill to surge to $93 billion in 2018-19 from $70 billion the previous year. This is likely to push up the current account deficit to US$65-70 billion or about 2.4 per cent of GDP in 2018-19. While a current account deficit of around 2.5 per cent of GDP is not alarming, and India's foreign exchange reserves are high, the level and direction of capital inflows, as well as the outlook for crude oil prices, would crucially influence sentiment toward the rupee,” Nayar said.