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The year 2018 was extremely volatile for the Indian rupee after sedate sideways range-bound trading for more than two years. The rupee has been trading between 63 and 69 since mid-2015, but went on to plummet over 14 per cent to a record an all-time low of 74.48 in October. However, it managed to claw back from this record low, recovering some of the loss. The rupee closed at 69.77 on Monday, the last trading day of 2018, down 8.5 per cent for the year.
The background
The currency began the year at 63 – the lower end of the 63-69 range – and consistently depreciated against the greenback from January. It tested 69 – the upper end of the range in late June – and managed to hold above it for some time. But the strong sell-off in emerging market currencies after the Turkish Lira tumbled to record lows in August dragged the rupee below 69 against the US dollar. The Indian rupee continued to trade below 69 thereafter, and tumbled to an all-time low of 74.48 in October.
Three major factors – crude-oil prices, foreign portfolio outflows and the US dollar index – were the major drivers of the rupee in 2018. Among the three, crude oil prices had the biggest impact on the rupee’s movement last year. WTI Crude Oil prices skyrocketing 33 per cent from $58 per barrel to $77 per barrel, and then tumbling more than 40 per cent from there to the current levels of $45, took the rupee from 63 to 74 against the dollar and then back to the current levels of 69.77.
FPI outflows
The second major driver was foreign portfolio investors (FPIs) selling Indian debt last year. After pumping in a robust $23 billion in 2017, FPIs pulled out $6.9 billion in 2018 from the debt segment, the highest since 2013. Indeed, this is the second-highest outflow on record from the data available since 2002.
Dollar strength
Along with oil prices and FPI money outflows, the strength in the US dollar also weighed on the Indian rupee. Though the US dollar index fell in the initial part of the year, it managed to reverse sharply higher from February. The index has surged 9 per cent from around 88 in February to the current levels of 96.
2019: What to watch
First, crude oil prices will continue to remain a major driver of the rupee. If oil remains subdued, the currency may retain its strength. But a strong upward reversal in oil prices from current levels may cap the strength in the rupee and drag the currency lower again.
Second, as the March deadline approaches, developments on the Brexit front may cause jitters in the currency market, which, in turn, may have an impact on the Indian rupee.
Third, rate hikes by the US Federal Reserve. Two increases are projected for 2019. Any change in this may impact the US dollar. The dollar may strengthen if the Fed decides to increase the rates more than two times, in which case the rupee may reverse lower.
Increasing concern on the slowdown in global growth remains another worry. The US dollar may gain safe haven status if global growth slows down, in which case the rupee could weaken.
Last but not the least, a key domestic event will need a close watch. The outcome of the upcoming general elections will have an impact on foreign flows, and this is also likely to influence the rupee movement.
Technical outlook
On the charts, the rupee has little room to appreciate further against the US dollar. A crucial resistance is poised in the 69-68 region, which is likely to be tested over the short term. Whether or not the rupee manages to breach 68 will determine the path for the rest of the year.
Inability to break above 68, and a subsequent downward reversal thereafter, may signal the end of the current upmove that was in place from the all-time low of 74.48. In such a scenario, the rupee can depreciate towards 72, or even 73 levels against the US dollar and remain range-bound between 68 and 73 for a prolonged time. However, the possibility of the rupee tumbling below 74 to record new lows is quite low, even if it remains below 69 in the New Year.
On the other hand, if the rupee manages to break 68 decisively, it can strengthen towards 66 against the US dollar.
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