Continuing its downtrend for the second-straight day, the Indian rupee tumbled by 24 paise to close at 66.92 against the US dollar on Monday. The domestic currency started the day on Monday sharply lower at 66.88 compared to last Friday’s closing value of 66.68 and witnessed a sharp fall to hit a fresh intra-day low of 66.97 before ending at 66.92. Going forward, Indian rupee remains an interplay of global and domestic factors.
Anindya Banerjee, currency analyst, Kotak Securities expects Indian Rupee to offer a median level performance and sees a broad range of 66.00 to 67.50 over the medium term. “A positive domestic policy backdrop needs a pro-risk mood in global financial markets. However, global risk assets will face periods of heightened risk aversion when there a major political shifts or even monetary policy shifts. During such stressful times, Rupee too would not be able to avoid weakness against US Dollar and Yen. However, the overall trend of Rupee will much stable than what it used to be prior to 2014,” he said.
With Banerjee’s help, we take a look at 7 factors that will drive the Indian rupee:
1) Global financial assets continue to benefit from easy money policies of major central banks. US Fed which adopted a divergent monetary policy guidance in 2014, has now reversed gear as economic growth and inflation trajectory is no longer convincing for periodic increase in rates as it had initially envisaged. Monetary policy convergence dampens volatility in interest rate market which in turn feeds through to other asset classes as well. A lower volatility and falling interest rates improves the appeal for financial assets like emerging market debt and stocks.
2) Global commodity prices have recovered, especially the industrial commodities. It appears more like a cyclical upswing within a secular bear market in commodities, which takes many years to play to out. The result has been some improvement in growth of commodity producing nations. At the same time, with overall commodity prices low, commodity consumers continue to enjoy a higher disposable real income.
3) Over the next 9 months, a few major political events is expected to have significant impact on financial markets as well. They are viz., US elections, Italian constitutional referendum, French elections and German elections.
4) Back home in India, economic growth is showing a gradual improvement. Consumption and government expenditure is driving the economy forward. Exports have stabilised. However, private capex growth will be slow. Cleanup of the banking sector would augment credit creation capacity of banks going forward. At the same time, strong focus on developing a vibrant credit market onshore should also improve the financing capacity in the economy.
5) Government is working hard to bring the cash economy under the ambit of taxation. We see that as a major positive. The small the size cash economy relative to the official economy the more developed that economy is. It will not only improve tax collection but also allow official credit channels to intermediate a bigger portion of the Indian economy. However, it does come at a cost of short term growth and employment. In that regard, a smooth implementation of GST would also help.
6) Inflation remains under check as monetary policy, fiscal policy and food stock management has struck a good balance to keep inflationary forces at bay. Low and stable commodity prices globally has done its bit too. Normal monsoon will bring food inflation down. All in all it appears that unless oil prices make sharp upmove over the coming months, headline CPI may stabilise between 4.75-5.00% over the next 9-12 months. It can create a room for RBI to lower repo by another 25-50 basis points over the same time frame.
7) Positive real interest rates and higher nominal interest rates will continue to make Indian credit attractive. The analyst expects FPI inflow in debt to continue. However, during times of sudden global risk aversion some temporary stoppage is flows can occur.