By Amit Pabari
It is said that inflows into the country lead to an appreciating move in the local currency and outflow leads to a depreciating move. For the first 9 months ending September, the equity market observed a whopping inflow of almost Rs 64,000 crore. Throughout this period, Indian Rupee remained in a tight range of 72.50 to 75.50 (As shown in the given weekly chart). The only reason behind the contained volatility and the tight range was RBI’s strong intervention.
Post-September, the equity market observed a heavy outflow due to multiple reasons such as hawkish turn by the Fed on rising inflation and upbeat US growth, widening domestic trade deficit, energy crisis due to supply disruption, and not the least one- Omicron variant. This all resulted in a depreciating move in Indian Rupee until mid-December up to the 76.30-mark. And this made it become the worst amongst the EM peers. Fortunately, the exporter’s rush and receding omicron risk cooled off a depreciating bias.
A story of 2021 will surely have a link with the momentum in 2022.
Negative factors for the Rupee could be:
1. India’s Union Budget & State elections: The focus will remain on India’s ‘budget’ in February and ‘state elections’. In the budget, we need to analyze whether the government comes up with a ‘Populist’ or a ‘Reformist’ one. It is really important to please both individuals and businesses. If it would be purely reformist then the market could take it otherwise that the government’s focus is on spending and infrastructure. And that higher fiscal target could lead to a deprecating move in the currency. A less populist budget will also nervous down the middle-class taxpayer. Moreover, we also have state elections in Goa, Manipur, Punjab, Uttar Pradesh, Uttarakhand, Himachal Pradesh, Gujarat, and Jammu & Kashmir. Any changes in power will surely impact the state policies, borrowing, and growth. Both these factors could create uncertainty in the market, and have a negative impact on the Rupee.
2. A chance of ‘Twin Deficit’: The ‘Twin Deficit’, or double deficit, occurs when a nation has both a current account deficit and a budget deficit. Fortunately, as per the latest data, India is into a current account surplus worth USD 6.5 billion in April-June 2021 on rising services surplus. But definitely, upcoming Current account data for Oct to Dec quarter, India will face a big deficit issue as trade deficit- one of the components of Current Account Deficit has widened to a record high level.
3. US Fed’s more than 3-rate hikes: Looking at a gap between inflation and current interest rates, a deep negative real interest rate will keep on pressurizing the Fed to meet the expectations. We are expecting that 3-rate hikes are not enough to calm down ongoing inflation, hence, the Fed could do at least 4 or maybe 5 hikes of 0.25%. On further hawkish stance, EM could experience a flight of capital towards US back. Summing this, we could expect the US dollar index to head further higher towards 100 and 102 in 2022. Whereas, support lies at 95 and 93.80 levels.
Positive factors on Indian Rupee could be:
1. January Anomaly and IPO/corporate borrowing flows: Just after knocking on the door of 2022, the market will closely track the ‘January anomaly’ (It is said that “As goes January, so goes the year”). In domestic cases, we have a list of companies who have already filed their DRHP with SEBI and along with that, we will also see corporate borrowing inflows. This could surely help Rupee to remain on a positive note, considering a sideways movement in USD.
2. RBI’s hawkish turn: That apart, RBI’s recent stance has been strongly hawkish and a step towards normalization. For the third time in December, the central bank has taken a hawkish move and announced VRR of more than Rs 2 lakh crore. This hawkish stance going into the New Year will also recede pressure from the Rupee.
Outlook: It would be interesting to watch whether Rupee’s 2022 suspense box contains a ‘Joyful gift’ or a ‘Big Punch’. Broadly for Rupee, we are expecting a tug of war between given ‘Positives’ and ‘Negatives’. Whenever, Rupee will test near the 73.50-74.00 zone, the RBI will jump in to support the export valuation. On the flip side, there are higher chances that Rupee could remain in a depreciating mode and move towards 76.50-77.00 over the next 3 to 5 months and 78.50 in 2022.
(Amit Pabari is the Managing Director of CR Forex Advisors. Views expressed are the author’s own.)