Inclusion in currency manipulator watch-list unlikely to impact rupee

As expected, the Indian rupee broke its prolonged sideways range below 65.3 last week. The currency fell to a five-month low of 65.51 on Monday and closed at 65.49, down 0.71 per cent for the week.

Pressure points

Crude oil prices surging about 9 per cent last week to $67 per barrel (WTI crude oil price) on the back of geo-political tensions was the first major trigger that applied pressure on the rupee. The missile attack on Syria by the US on Friday, coupled with weak trade data on the domestic front, dragged the rupee below the level of 65.3 on Monday. The US Treasury adding India to its watch-list for currency manipulation is also adding concerns to the rupee. India’s trade deficit widened in March. Data released by the Ministry of Commerce showed that the trade deficit widened to $13.69 billion in March. The deficit was $11.98 billion in February and $10.65 billion for the same period last year. Surging imports continue to keep the trade balance under pressure.

Concerns remain

Crude oil price, which is rallying on the back of geo-political tensions, may continue to remain a concern for India’s trade balance. This, in turn, may limit the strength in the rupee and drag the currency further lower over the long term.

A new wave of concern has emanated with the US adding India to its watch-list of currency manipulators. The US considers three main criteria to bring a country into its watch-list.

First, if a country has significant trade surplus with the US. According to the US Treasury report, India had a trade surplus of $23 billion in 2017, and is stated to be the highest on record.

Second, if the country has significant current account surplus. India does not fulfil this criteria as its current account has been in deficit consistently. As of the quarter ending December 2017, India’ s current account deficit is $13.48 billion.

The third criteria is if a country is found to be intervening in its foreign exchange market consistently for domestic interest – that is, if a country has been buying foreign exchange continuously, totalling in excess of 2 per cent of its GDP over a period of 12 months. Since the official data for intervention is not available, the US has considered the net purchase of foreign currency as a proxy, which makes India fulfil this criteria.

Though India has made it to the watch-list, the possibility of it being termed a manipulator is not high. This is because India has been running a wide current account deficit. In spite of consistent foreign exchange purchase, the rupee has strengthened against the dollar by over 6 per cent in 2017. A strong rupee makes US imports cheaper, and help reduce its deficit with India. As such, the impact of this event on the rupee could be short-lived. The strong break below 65.3 is negative for the rupee. This leaves the overall bearish outlook intact for the currency. The region between 65.3 and 65.2 will now act as a strong resistance for the rupee, and can limit the strength in the near term.

A fall to 65.8 or 65.9 is possible in the near term. A break below 65.9 will see the rupee weakening towards 66.2 over the short term.

A recovery rally from around 66.2 to 65.8, or even higher levels, cannot be ruled out. But the overall bias will continue to remain bearish. As such, an eventual break below 66.2 will see the rupee falling towards 67 levels over the medium term.

The rupee will get a breather only if it breaks above 65.2. Such a break will see the currency recovering towards 65 and 64.8 levels again. But such a strong upmove looks less probable at the moment.

COMMENT NOW