Whether the rupee will plunge towards 80 or will remain well bid is anybody’s guess
Decades ago, when I went to Houston as a graduate student, I was hailed as the “spiritual leader of millions” every time I went to Prufrocks, my favourite bar at the time. A little over a month ago, I drew on this authority to explain the way people of different spiritual persuasions would forecast markets (bit.ly/2Uy1mIx). As it turned out, at least till now, the technical analyst [spiritually agnostic] had at least a half-correct forecast.
Updating that “research” suggests that if USD-INR were to fall substantively below the neckline shown in the accompanying chart, it would complete yet another head and shoulders with a target of [75.00 + (75.00 – 72.36)], or 77.64
Of course, there have been huge inflows into the equity markets over the past week or so and RBI has had its hands full trying to prevent the rupee from strengthening; so, this “thought from above” is counter-intuitive, particularly with many large IPOs and direct investments in the pipeline.
But let’s stay with this possibility and list the factors that could support a move to a weaker rupee. First is the fact that the rupee has been “strong” for so long—it has gone 317 days without hitting a new all-time low; the average period between all-time lows since 2005 was 392 days; so, just from averages, sometime over the next six months, we could see a downward dip. Next, turning to fundamentals (the focus of atheists), it is becoming more and more apparent that the US Fed, despite chairman Powell’s rhetoric, is preparing to unwind its asset purchases in the face of inflation. From an expectation, as recently as six months ago, that the first rate hike would be in late 2023 or early 2024, market is getting ready for the first hike at the end of this year or early 2022 at latest. Like climate change, inflation, when it starts up, moves faster than most people expect and believing, as Powell apparently does, that he will be able take the punch bowl away at the right time, usually results in a lot of spilled punch.
Now, there are arguments that the current sharp rise in prices is driven largely by supply constraints and hence are likely to be temporary as these constraints work themselves out. On the other hand, the threatening third wave in most of the world could derail this smoothening of the trade processes. In any event, temporary can last a long time.
Again, and importantly, China, which exported deflation to the world for well over a decade, is no longer the cheap, cheap, cheap economy it used to be. To be sure, it appears to be slowing right now, which could reduce the demand for commodities, like copper and oil. But, as with American innovation, it is foolhardy to write off Chinese growth, and the structural shift from being an exporter of deflation to participating in global inflation is well under way.
And, of course, the other elephant on the planet is the flood of money still driving financial markets. Further, even when central banks start to reduce their bond buying, it is certain that governments are not going to let up on their fiscal munificence, which is not just a political imperative but also critical to support and sustain healthcare systems, infrastructure and green energy.
Interestingly, US Treasuries are sending conflicting signals, with yields slipping just as inflation readings rise. While some analysts believe this indicates that the market believes that the Fed has things under control, and interesting article I read (bit.ly/3eETkVk) suggests otherwise—that interest rates will remain low even as inflation stays elevated.
This is certainly true in India where prices, particularly of food, are beginning to take on political overtones. And, with several state elections coming up, even the otherwise-uncaring government will have no choice but to pump in more money closer to the ground level. The question is whether RBI will be able to contain the market or whether there will be an increase in nervousness, leading to greater volatility in the rupee.
Fundamentals, as always, offer only more uncertainty. Whether the rupee will break through the target in the technical vignette above and plunge towards 80 (as so avidly forecast for several years by a dear friend of mine), or whether it will remain well bid with investors, strong exports and RBI’s need to control inflation in support, is anybody’s guess. The lord works in strange ways.
The author is CEO, Mecklai Financial