Currencies across the globe seem to be largely guided by actions of the US Federal Reserve, with rupee witnessing only moderate volatility, says a report by Care Ratings.
According to the credit rating agency, the single most important factor that is affecting the course of currencies is the Fed action or inaction related to interest rates.
The Indian rupee has witnessed a moderate volatility so far this year and its movement towards Rs 68-69 during the year looks likely, it said.
The volatility (on annualised monthly basis) has been really high for some of the currencies such as those of Argentina, Russia, South Africa, Brazil, Australia and Mexico.
As per the report, the rupee has been following an uneven path in 2016 and has behaved quite well during this period, guided partly by the fundamentals as well as selective intervention from the RBI.
The agency observed that besides the Fed monetary action, the rupee is also being influenced by lower growth in trade deficit as well as current account deficit, positive FPI flows in April and May and movement of interest rates in India based on RBI policy stance.
“The reaction of currencies across the world was negative as it is assumed that higher rates in the US will cause a reverse flow of investment from the rest of the world to the US and as the dollar would strengthen, the other currencies would be impacted,” Care Ratings said.
“There is hence a good deal of volatility in the market every time the Fed has to make its announcement as another 25 bps hike would have the potential to impact investment flows,” it added.
The Fed had increased rates by 25 bps on December 16, convinced that the US economy was on the recovery path and that policy would have to be proactive to contain a targeted inflation rate of 2 per cent.
“However, conditions have been quite uncertain since then,” the report noted.
While the emerging markets are expected to do better than the developed countries, the latter would be showing improved growth relative to 2015, it added.