The rupee made a turnaround from 75.70 to 73.85 levels moving from October to November
By Amit Pabari
“Life is a juggling act with your own emotions. The trick is to always keep something in your hand and something in the air. The world cannot be governed without juggling.” The Rupee has also been stuck in the same time loop as it has been juggling between a strong dollar and hot inflows and trying to strike balance around them. The rupee made a turnaround from 75.70 to 73.85 levels moving from October to November. And as the juggling basics work- what goes up does come back down, and what comes down shall go up again, it will be watchful if rupee makes the reversion back towards 75 and above levels or not.
Let us analyze one by one the factors which led to the recent rupee appreciation against the dollar and going ahead what are the structural tailwinds that will continue to weigh on the INR.
The IPO story: It all began with the expected return of foreign capital into India’s key indices after being net sellers for nearly Rs 13,350 crore in October giving some room to rupee. The series of IPO with Policybazaar (Rs 5,600crore), Paytm (Rs18,300 crore) and SBI (Rs 4,000 crore) bond raise transposed FII back to India and increased the demand for the rupee. The flow story will continue in the primary market (IPO) for Rs 20,000 crore, but the secondary market is still under pressure due to profit booking. So far, RBI has been excellent in absorbing flows, but whether it remains active downside or leaves rupee to market will be watchful.
Dovish Fed: A statement by Raghuram Rajan comes to my mind while I write about Fed-“Monetary policy is like juggling six balls… it is not ‘interest rate up, interest rate down.’ There is the exchange rate, there are long term yields, there are short term yields, and there is credit growth.”
Ideally, Fed confirming the timeline for tapering, yields should have gone up. But the bond yield slid almost 10% after the Fed announced an expected reduction in stimulus but signalled no hurry to hike interest rates while reiterating inflationary pressures are likely to be transitory. This “dovish taper” by Fed led to a fall in US Treasury yields to 1.47% thereby pushing dollar back to ground and rise in other riskier assets. Thus until the economic outlook and policy direction gains clarity dollar shall remain under pressure.
Slight correction in oil: In the past week, oil prices tumbled almost 4% to below $81 a barrel as a higher-than-expected US crude inventory build and the scheduled resumption of Iran talks pressured oil prices. Iran announced that it is set to resume negotiations for a nuclear deal with western powers in a bid to remove US-imposed sanctions. This provided some breather to a net oil importing nation-India as it threatens to derail its post-pandemic economic recovery with a widening deficit.
RBI intervention: The spree of IPOs in the pipeline brought in huge dollar funds. Normally, RBI absorbs these dollars from the market which results in a rise in rupee liquidity. The increase in the supply of rupee without a corresponding demand makes the rupee depreciate against the dollar. Thus any sudden appreciation merely on account of inflows is prevented. However, the absence of RBI intervention probably on the back of the IMF advice to RBI to avoid excessive forex interventions incited appreciation past 74 levels.
In the past few sessions, the rupee has cherished all of the above positives. However, going ahead the below concerns would continue to remain a headwind for the rupee:
Elevated crude oil: Distress of global demand overtake supply, crude oil prices would remain at elevated levels posing major risks for India with a double whammy of inflation and the trade deficit. That apart, oil importers who have already taken a heavy beating in past month will definitely rush to cover their imports. Additionally, OPEC+ remained sticky to continue with their current output and avoided calls from the US for extra supply for winter season. This could lead to rupee depreciation.
Fed’s actual taper: As we head closer to November end, we will get more hints as to how the Fed plans to do the taper added more fuel to the volatility. US central bank policymakers sent mixed signals, with Chairman Jerome Powell promising to be “patient” before hiking rates, while St. Louis Fed president James Bullard expects two rate hikes in 2022, based on current economic data. Fed members are behaving just like in the past months where they had first accepted the sustainable inflation and hinted at tapering- then remained mixed to dovish-and then all of sudden turned hawkish. Any such hawkish surprise could hint at a strong dollar rally and hurt rupee again over the upcoming months.
US economic data: Annual inflation rate in the US surged to 6.2% in October of 2021, the highest since November of 1990 and above forecasts of 5.8%. Also, the US published strong non-farm payrolls (NFP) data as the economy created more than 531k jobs in October showing improved labor market. Both factors remaining Fed’s favourite measure to enable rate hike thoughts have been back on the table for a bull USD.
RBI-The game-changer: So far in the recent appreciation rally, RBI remained in muted mode, but given the move from 73.85 to 74.37 levels, looks like the juggler has performed his act and capped the rupee gains to keep the exporters interest intact and also pile up their forex book.
With the US dollar index is still quoting on a strong note amid quicker economic recovery than peers, persistent energy supply issues leading to spiked oil prices, and Fed’s pullback of stimulus on cards overall, we are expecting that the USDINR pair should bottom out near 73.80 to 74.10 zone and move back higher towards 74.70-75.00 over the short term and 75.50 levels over the medium term.
(Amit Pabari is the Managing Director of CR Forex Advisors. Views expressed are the author’s own.)