We expect USD/INR spot to continue its range bound move with a bullish bias. 75 will continue to act as a crucial support and 76, crucial resistance.
- By Rahul Gupta
Both traders and businesses know that any currency can experience periods of high volatility and Indian rupee is no exception to it. The volatility in the currency market had surged with the active participation of dollar bulls when COVID-19 pandemic brought the world to its knees. This emotional fear of COVID-19 contagion, which popped up in new places every few hours, depreciated Indian rupee to 76.94. The COVID-19 widespread has put global growth in the doldrums. India’s growth momentum was already decelerating in previous quarters before the coronavirus pandemic forced the country into a nation-wide lockdown. However, with the increasing number of cases in India, the nation is struggling to cope up in the shadow of Covid-19. India is moving towards unlocking its nationwide lockdown that was imposed in March and the risk of the virus bouncing back still remains on cards.
India’s manufacturing production and service sector has shrunk making firms cut staff. While Q4FY20 growth has expanded at a slower pace of 3.1%. While the high-frequency indicators exhibit a broad-based drop in both the demand and supply sides. And unless this doesn’t revive, the growth will continue to shatter. Moody’s has downgraded India’s growth and expects FY21 GDP to shrink by 4%. Such a slowing domestic economy will prevent Indian rupee from recouping this year’s losses against the dollar, along with pessimism around the re-igniting US-China trade dispute and the ballooning fiscal deficit. India’s fiscal deficit may be over 5% in FY21.So far, we have seen several large deals, involving foreign institutional and portfolio participation, and large inflows are expected, with Reliance Jio alone announcing several transactions so far. Since early May, daily moves between 75 to 76 in the rupee have been the norm. A stark contrast to market conditions a few months ago. The volatility also started falling indicating an indecisive market trend. However, there still exists uncertainty associated with the development of vaccine and US-China trade tiff which typically affects the volatility.
In such a scenario, any business that relies on import or export of goods fear that such volatility can make or break them. Although, risks may be minimised with the right measures in place. Traders may go for spot transaction, which is one of the easiest ways to manage foreign risk if they have remittance inflow/outflow on a daily basis. The spot transaction may mean you forego a better rate in the future, but it does minimise the risk of future volatility in your desired foreign currency right now. A natural hedge is also ideal for businesses that are already selling overseas. Forex bank accounts can be a great way to provide this natural hedge. Many offer local account details in multiple currencies, all within the same ‘virtual wallet’ so it’s easy to manage, hold and convert money in the same place. While a futures exchange-traded contract will allow your business to guard itself against price fluctuations by locking down an exchange rate at the current price. This contract provides peace of mind and an assurance that you won’t actively lose money on your foreign exchange exposure.
In recent days, persistent rally in equities has reflected a general sense of optimism in the financial markets that is at odds with the coronavirus pandemic. Thus, we expect USD/INR spot to continue its range bound move with a bullish bias. 75 will continue to act as a crucial support and 76, crucial resistance. We recommend importers to hedge their near-term forex exposure in a staggered manner with 40% of exposure around 75.60/75.70 then more 40% around 76.20 and remaining 20% around 76.70 mark. While, exporters are suggested to go for hedging only if spot falls below 75.30, as above this level exporters need not hedge as the price movement would be in their favour. They are recommended to go for 25% hedging below 75.30, then 50% at the crucial 75.0 mark and remaining at 74.50 level.
(Rahul Gupta is Head of Research- Currency, Emkay Global Financial Services. Views are the author’s own.)