The exchange rate situation remains quite fluid with the rupee tending to weaken, driven by both fundamentals and extraneous forces, a report from Care Ratings said. A higher trade deficit, combined with negative FPI flows, has contributed to the weakening of the rupee. The rupee-dollar rate, which was at 65/$ in early April, reached 68/$ by mid-May, hovered in that region for a while, and has now reached 69/$.

Care Ratings noted that with the RBI selling dollars intermittently to stabilise the rupee, the forex reserves, too, are lower than in March 2018. Added to the weakness in the rupee is the heavy air in and around global trade, which may prove to be a major impediment for the emerging markets, the report noted.

Forex reserves

Care Ratings noted that foreign exchange reserves have been declining since April 2018. The RBI, in the face of a weakening currency, has intervened by selling dollars. As of mid-July 18, foreign currency assets of the RBI stand at $380 billion. The cumulative sale of dollars for the months of April and May 18 is around $8.25 billion.

Further, the report said that futures trade in currency also project a depreciation, as the underlying currency contract dated September 2018 closed trading at 69.35/$. There is an anticipation of a slight appreciation in the rupee, given the intervention by the RBI through sale of dollars. The close price for December 2018 dated contracts is 70.08. The effect of intervention has not brought in much positive expectation, as the close price for the March 2019 dated contract is at 70.75/$.

Care, however, believes that with equilibrium returning to the oil sector and FPIs turning positive during the course of the year, there will be more stability in the forex rate. By December, Care expects the exchange rate to be around 68-68.5/$. As the rupee has already fallensignificantly so far, Care expects further attention from the RBI to ensure the rupee does not fall sharply in future.

 

 

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