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The rupee has moved lower at a breathtaking pace, depreciating 16 per cent since this February. Though it is domestic factors, including the current account deficit and slowdown in portfolio flows, that is applying downward pressure on the Indian currency, this bout of weakness is also influenced by the political stalemate in Greece.
The euro has been heading lower on growing fear that inability of Greece to form a stable government can hasten its exit from the Euro zone.
Rising risk-aversion has resulted in the dollar moving higher, eroding the relative values of other currencies such as the rupee.
We used a combination of technical analysis and statistical methods to arrive at the band that the rupee can move if: a) the condition in the Euro zone does not deteriorate from these levels; and b) Greece exits the Euro zone.
First scenario
If Greece manages to forge a coalition in the June elections, the euro decline can halt at 1.21 against the dollar. This occurs at 50 per cent retracement of the secular uptrend in the euro-USD pair. This level also corresponds with the trough formed in June 2010.
If the euro moves down to 1.21, the lower limit for the rupee would be 58.32; the upper limit would be 54.02.
Second scenario
If the Greek elections in June too fail to throw up a stable government or if the new government is not willing to enforce austerity measures resulting in Greece' exit from the Euro zone, the euro-dollar rate could hit 1.12.
This occurs at 61.8 per cent (Fibonacci retracement level) of the secular uptrend in the euro-dollar rate. It is highly unlikely that the euro will decline below this level, this calendar.
Euro at 1.12 can drag the dollar-rupee rate to 63.16. This is the lower limit. The upper limit in this worst-case scenario is 58.87.
Method of analysis
To arrive at the predicted band value of INR-USD exchange rate, variation of INR-USD was estimated using the independent variation in EUR-USD over the last one year. The standard deviation in the movement of INR-USD was used to generate the lower and upper bounds.
The analysis does not take into account the potential policy moves that the governments may undertake to tackle the exchange rate movements. Rather, the forecast from this investigation is strictly based on the data in the last one year.
Also, several factors cause movement in exchange rates. In this analysis, however, the variation in one exchange rate is estimated using another.
Therefore, implicitly, the various influencing variables are factored into each of the exchange rates separately.
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