After 6 years, rupee rises and greets New Year

After six years of continuous fall, the rupee has closed in the positive against the US dollar in 2017.

The domestic currency broke above the crucial hurdle level of 64 and closed the year with 6.34 per cent gain at 63.87.

After 2010, this is the first time the rupee is recording a positive close against the dollar on a yearly basis.

Also, this is the just the third time it is making a positive close and also its best showing in the last 10 years.

The years 2009 (4.9 per cent) and 2010 (4 per cent) were the other two instances when the rupee had ended the year in green against the dollar.

The worst fall in the last 10 years was seen in 2008 when the global markets were hit by the US mortgage crisis.

The rupee had tumbled 19.2 per cent in those years. The years 2011 and 2013 were the other two bad ones for the rupee in which the currency fell more than 10 per cent against the dollar.

In 2011, the rupee was down 15.75 per cent. In 2013, the rupee, down 11 per cent for the year, recorded its all-time low of 68.85 on the back of strong foreign money outflows after the US decided to taper its quantitative easing.

What moved the rupee?

The major trigger for the rupee’s strength came after the BJP’s victory in the Uttar Pradesh elections when the currency broke above 64.

Weakness in the US dollar and strong foreign money inflows into the Indian debt were the other major factors that kept the rupee on a strong footing all through the year.

The Indian debt segment had witnessed an inflow of about $23 billion last year, the second best from the data available since 2002.

Outlook for 2018

Experts believe that rupee can continue to strengthen initially in 2018, but the strength is expected to be limited. They see rupee losing momentum possibly in the second half of the new year.

According to a report from Credit Suisse, structural reforms in the country could aid foreign inflows. The firm forecasts the rupee to average about 63.5 against the dollar in 2018.

Sajal Gupta, Head – Forex & Rates, Edelweiss Securities Ltd says, “We expect the strength in rupee to continue in the first half of 2018. But, depreciation pressure can emerge in the second half of the year as the global bond yields are expected to trend higher”. He expects the rupee to remain in a range of 62 and 65.5 in 2018.

Indranil Sengupta, India Economist, Bank of America Merrill Lynch, sees an oscillating rupee on the back of a tug of war between the Reserve Bank of India and the US dollar. Contrary to other experts, he expects the rupee to weaken initially in 2018.

He writes, “We see rupee falling to 65.5 against the dollar by March on the back of US tax reforms and then strengthen to 64 by March 2019”.

The US tax reforms, expected to boost the dollar, is one of the major threats for the rupee in 2018. However, experts don’t see it having an immediate effect in the short term which is why they expect the rupee to strengthen in the initial period of 2018.

“The main transmission channel through which taxes are supposed to affect investment spending and the economy is through (expected) profits. Corporate profitability is already at record levels and so, the impact could be seen only over the medium to long term” says Sajal Gupta. Increasing oil prices is another possible threat for the rupee.

“The movement in dollar will be determined by the trade-off between monetary and fiscal condition in the US. However, domestically, rising oil prices and the widening current account deficit (CAD) could pose minor challenge for the rupee,” says Soumyajit Niyogi, Associate Director – Core Analytical Group, India Ratings & Research.

According to him, oil prices might stay around current levels which is a kind of neutral for the currency.

“But, if oil prices go up from here and flows in the capital account do not improve, it could bring pressure on the balance of payment (BoP) front which in turn can weaken the rupee”, cautions Niyogi.

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