The current move in USD/INR started in the month of July 2011 from a level of 44 when the rupee hit the high of 43.8550. This was the time when growth in the India had started to slow down and the European debt crisis was in the process of blowing out of proportion. Until then rupee was moving in a range of 44-46. Most of exporters sold at 46 levels and importers/ loan hedgers expecting that rupee would reverse back to 44 did not cover their exposure.

The rupee did not reverse and started weakening to levels of 48-49. Since most of the exporters had already sold, there were no suppliers for dollars. Due to problems in Europe, especially Greece, Spain and Italy, the flow of dollars from FIIs also started to dwindle.

Short-covering

The main demand for dollars came from the oil companies who had to buy about $300-400 million on a daily basis. Once rupee crossed the psychological level of 50 to the dollars, panic and short-covering set in.

Importers/ loan hedgers started to buy apart from the oil importers and thus rupee declined to new levels. When 52.20, which was the previous high, was breached, more panic buying set in and rupee reached a new high of 54.30.

RBI which had been watching from the sidelines and was selling intermittently, then brought in new regulations on December 15 when it stopped rebooking of cancelled contracts, reduced daylight and overnight limits of banks and in case of all forward contracts booked after Dec 15, the profit was not to be passed on to the customers. RBI also sold dollars resulting in dollar longs getting cut.

FIIs’ buying spree

FIIs brought in about $12.6 billion in a space of three months from January to March and rupee came down to 48.20 levels. Oil companies again started to buy at these levels while exporters who had not been able to cancel their short positions, stepped in along with other importers/ loan hedgers and took the rupee again past the high of 54.30 and went up to 56.30 from where RBI had been selling .

The FII inflows have again dwindled though there have been no aggressive outflows. However, the buying has been relentlessthough RBI has been selling and its forex reserves have fallen by more than $20 billion.

We have been facing the problem of a high trade deficit along with a deficit in the balance of payment situation. The high inflation along with slowing growth has further complicated the matter as we are close to a stagflation.

Sluggish growth

Political indecisiveness on various reforms/ legislations and RBI not able to cut rates due to sticky inflation, have slowed our GDP growth and foreign investments in the form of FDI and FIIs have paused. We, being a capital-deficit country are in requirement of foreign capital to fund our current account deficit. With stock markets also falling there was no incentive to sell dollars against the rupee for the short term.

The rupees relief rally from 56.52 to 54.92 due to the pro-growth monetary stand adopted by RBI earlier and which could have then brought in off-shore flows into debt and equity market was prematurely ended, while dollar was expected to fall to 53.50.

The, RBI’s pause mode on the policy rates and CRR had taken rupee down by about 3.62 per cent from 55.33 to 57.33 thus opening the gate to 58. The external stake-holders (including global rating agencies) consider issues relating to growth, fiscal deficit and governance as major factors for rating downgrade.

Rating blues

The delay in RBI’s growth supportive stance (and resultant pressure on GDP growth and fiscal deficit) has now pushed Fitch to join S&P to deliver downgrade by revising its rating outlook from stable to negative though Moody’s has kept the rating outlook as stable. There is also threat from them for moving India from investment grade to junk status if they do not find reforms being stepped up by the Central Govt.

The undertone had been clearly bearish for rupee as we saw it plummet to levels of 57.33, until we saw Mr Pranab Mukherjee being nominated for the President and the Prime Minister taking charge as Finance Minister. Dr Manmohan Singh said he is keeping a watch on the value of the rupee and he wanted to make things conducive for further investment coming into the country. This has taken rupee down to 55.80 at the time of writing this column which is 25 days low for the rupee.

The Euro Zone summit also gave some positive vibes. However, considering the uncertainties (and risk factors), it is advised for importers to cover one-month payables on spot rupee gains into 55 while there is no need to chase any near-term weakness in rupee.

Strategy

Importers to keep a stop-loss beyond 57.40 because, at this stage, FIIs will get into wait-and-watch stance and may even trim their positions in debt and equity capital market. Let us consider external factors as neutral as dollar index stays in consolidation mode at 81-82.60.

 For the exporters, they need to sell into the rupee weakness as RBI and the Central Government is expected not to allow rupee to go past 57 levels. Long-term selling of dollar will get us at least to 52 by the year end which should be a fair value for the rupee.

For the present, the rupee is grossly undervalued considering the present level of the dollar index. Thus, all weakness on rupee should be used as an opportunity to sell from here. Exporters should also ensure to keep a stop-loss at 55.80 if they do not get the desired weakness on the rupee, below which we could see a swift, run to 55 levels and then to 54.50.

 

(This article was published in the Business Line print edition dated July 1, 2012)
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