From time to time, the financial papers print forecasts of the future of the rupee, taking inputs from banks, consultants and other interested parties. These are always herd-like with most forecasts bunched narrowly around the current value; if the market has been trending, there will sometimes be a few forecasts following the trend. We contribute to these group forecasts as well, even though we know full well1and always say as much to the journalist—that 3-month or 6-month forecasts are meaningless. Only very short-term forecasts—a couple of days or even a few hours—can work to make money, provided you run a professional dealing operation with a very disciplined stop-loss and sound money management. This is, of course, not an activity for a company that has a running business with embedded FX risk. It is understandable, of course, that companies would like to know what is likely to happen to the rupee, particularly if and when a trend is about to turn. But, of course, turning points are even more difficult—indeed, impossible—to forecast. The best we can do is fall back on history and the belief that everything is cyclical and that the longer a trend persists the closer it is to a turning point. Another old wives tale about markets is that when volatility rises suddenly and sharply, we may be approaching a turning point. In fact, the most significant “news” from the rupee market today is that, while the rupee remains relatively quiet in a range of 64.50-65.25, USD/INR volatility has risen quite sharply over the past month. At 5.56%, it is 75% higher than the 10-year low it reached a couple of months ago, and is now the highest it has been since March 2016.
Given that the rupee has been “strong” for nearly a year, rising from a low of 68.70 in November 2016, this sharp rise in volatility could be signaling a turn towards a weaker rupee. Of course, another secret of well-considered forecasters is that you can forecast a direction (or even a rate) but never the timing, in other words rendering the forecast useless for all intents and purposes. With all these caveats, I decided to try and build a medium-term scenario—one out of infinite possibilities, I hasten to add. Since 2006, there have been four uptrends in the rupee, the average tenure of which was 453 days (low of 100 days and high of 875 days) and the average rise in the rupee during these trends was USD/INR 7.37 (low of 5.07 and high of 9.92). The current uptrend (365 days to date) is longer than two and shorter than two previous ones and the rupee’s gain during this trend (4.10) has been lower than in all previous trends. Clearly, there is nothing conclusive to grab here. Nonetheless, if the trend were to (as if by magic) replicate the average over the last ten years, the rupee would change direction on Feb 24, 2018 by which time it would strengthen to 61.32.
This is quite a tall order over the next three months—the strongest recent rupee forecast was for 62.50. But anything is possible. If, for instance, the BJP were to put up a stronger showing than expected in the Gujarat election and the dollar were to weaken sharply—say, as a result of some shockingly back employment numbers that could hold up the expected rate hike; and/or some new scandal that slows down the Republican tax plan and/or Merkel pulling it back together and/or…—the rupee could certainly surge. After that, however, it would go into a swoon. The last four rupee declines (again since 2016) lasted an average of 494 days (low of 335 days and a high of 922) during which it fell an average of USD/INR 12.85 (low of 10.12 and a high of 16.57).
Thus, if history repeats itself exactly, after the rupee turns in Feb 2018, it will fall to 74.18 on July 4, 2019. Down moves in the rupee are usually sharp, with a large part of the decline coming in the early stages. This suggests that the turn would be triggered by some major global conflagration, possibly (and particularly given valuations) a global equity collapse early next year. The situation could be exacerbated by the increased risk of disconnects in decision-making as a result of the spread of nationalism in a number of countries over the past several years. But—and here’s the good news—all will be well after that since the decline in growth as a result of the crisis would unseat the bigoted, narrow-minded and unsavoury leaders in so many countries (including India) who have been trying to turn back the irrepressible tide of modernity. 2020 will be a new beginning!