This week began with a blow on Rupee value, which closed at 65.10. This of course is a six month low against US Dollar. What is the reason?
- There was heavy buying of US currency more so due to the concerns on macroeconomic front.
- After March 24, this is the weakest closing scenario for the home currency, which had then closed at 65.41.
- Corporates’ panic buying of dollar and that of the Importers’ concern contributed further for the rupees fall.
- Outflow of funds from domestic capital market resulted in weakening of forex market, which otherwise was due to a hike in Federal rates and removal of various measures against unsupportive global factors.
- The expectation is that rupee could fall to 66 levels in the near future.
- However, the rupee fall was an expected one. The short positioning in USD versus INR was stretched too much, both onshore as well offshore and thus, carry trade being wound up was an expected move.
ON THE GLOBAL FRONT:
- Federal Reserve plot indicates that 12 out of 16 members expect a 25 bps rate hike by the end of 2017.
- This has resulted in a probability of a December hike to 63% which was 38% till recently.
- This in turn has pushed the US yields higher and resulted in strengthening of USD position against European Currencies.
- Further, as the spread widens, the probability of US dollar strengthening further especially against Asian and European currencies are more.
- Also, the 25th September ’17 tax plan of Trum Administration has pushed for tax cuts to be passed by the Congress.
ON THE DEMOCRATIC FRONT:
- An increase in imports, due to demonetization and GST supply shocks, due to Trade deficit could further weaken the rupee.
- Also, if additional indirect tax collections are mooted by the Centre, towards enforcing additional fiscal measures, this may result in an adverse position on the domestic yields, which could hit FPIs, who have heavily invested in Government bonds this year.
- It should be seen as to what the Central Bank will do when rupee depreciates. When there was appreciation of rupee, the central bank intervened and kept it in line with other Asian Currencies which has increased the reserves position.
OPTIONS WITH RBI:
- From the rupee depreciating the Central Bank, unlike in 2013 can intervene through exchange traded currency futures market.
- Central bank has an option to strike a balance between export competition and inflationary pressure.
- The risks of USD and INR increasing further due to global and domestic factors are seen on the higher side.
- Though 64.35 would be steady rate expected on the lower side, there are very many chances of Rupee going upto 65.50 and 66.00 against a dollar, in another 4 to 6 months period.
- The tense political developments in the Korean Peninsula, could be a deciding factor in deciding the USD/INR rate fluctuations.