Current volatility in currency markets dragged Indian rupee to its 2-year low in the recent past. Market experts believe there is a high risk of further depreciation of rupee in the present market conditions.
However, according to Anindya Banerjee, AVP, currency derivatives at Kotak Securities, Indian rupee, inspite of over 5 per cent decline in the ongoing financial year, is still one of the best performing currencies against the US Dollar, matched by Taiwanese Dollar and Israeli currency, in the emerging market space.
Dollar has been the currency of choice because of the economic slowdown in emerging market space, fear about unhedged foreign currency loans in emerging markets (EMs) and hopes for a tighter monetary policy in US.
In the first half of the ongoing financial year 2015-16, rupee depreciated around 5.03 per cent to 65.74 on September 30 from 62.59 on March 31. Rupee touched a low of 66.7445 on September 7. It was at 66.8875 on September 3, 2013.
On the present weakness in rupee, Debopam Chaudhuri, vice-president, research and chief economist, ZyFin Research, said, “Devaluation in Chinese yuan implemented in early August, necessitated by a slowing Chinese economy put pressure on Indian currency. In-fact, RBI Governor Raghuram Rajan had hinted at an expected currency war in one of his speeches at London Business School in June of this year, when he compared current trends to that during the Great Depression of 1930s. He referred that policy makers may resort to steps similar to the ones taken during the Great Depression, to boost demand, unless there is more International Co-operation on policy issues.”
This time however, the RBI has been intervening in the currency markets to rein in any major shocks, as per market practitioners. Indian rupee always remain an inter-play of domestic factors as well as global factors. Before investing in rupee an investor should keep an eye on the trajectory of the US Dollar against emerging market currencies and also the trend of Indian stock market and debt market.
Banerjee said, “A rising stock market and debt market due to buying from FIIs augurs well for the rupee. Economic factors affect rupee over the longer term. As a result, trajectory of exports and imports, inflation and fiscal balances have to be watched.”
The Reserve Bank of India (RBI) has recently surprised market participants by not only cutting interest rates for the fourth time this year, but by a much larger amount than expected 50 basis points. Although economic growth in India is strong, it is suffering from a decline in momentum and it is quite clear that the central bank are cutting interest rates to encourage further borrowing and to target domestic growth.
Lukman Otunuga, research analyst, ForexTime.com, said, “The theme of falling commodity prices in addition to other concerns including the economic health of neighboring Asian nations have added downside risks to the Indian economy, and we can see this with slowing GDP growth. It does appear that the probability of a continual slowdown in economic growth is high in India, and so the RBI has taken the steps to promote domestic momentum within the Indian economy. It has recently been reported that economic growth through credit has declined to yearly lows, meaning it is clear that lower interest rates are being used as a catalyst to boost investment within the Indian economy.”
On the Indian currency’s further movement, experts believe rupee will trade in between 65 and 68 levels with high risk of depreciation. Banerjee said, “We can see rupee remain in a range of 65-67.50 for rest of the financial, with risk of depreciation remaining higher. We expect global economy to continue to slow. A weak global growth, weak global flows and our own weak economy and stretched balance sheets of financial players and non-financial entities, can keep the rupee weak. RBI too trying to keep the currency competitive, may not be too eager to see rupee appreciate beyond 65 to a Dollar.”
Jitendra K Parashar, currency research head, Karvy Stock Broking, said, “We expect rupee to remain under pressure as ongoing Chinese economic slowdown concerns shall continue to haunt global markets in coming quarters as well.”
India’s manufacturing sector output slipped to a seven-month low of 51.2 in September, as order flow turned sluggish amid “difficult economic climate”, a Nikkei survey said on October 1.
“Overall towards the end of ongoing financial year we may witness Indian Rupee struggling near all time low levels with high volatility. At the same time it is expected to continue outperforming other emerging market currencies. Technically, 69.25 shall act as a good resistance in rupee spot as momentum is still exhibiting underlying weakness in rupee. We can expect a range of 69.25-65.30,” said, Parashar of Karvy Stock Broking.