Rupee lags its emerging peers in spite of dollar weakness

Gurumurthy K BL Research Bureau | Updated on January 29, 2018 Published on January 29, 2018

Deficit worry looms as the currency gears up for an eventful week

The weakness in the dollar has driven major emerging market currencies higher since the beginning of the New Year. But the Indian rupee seems to be lagging behind its peers.

The US dollar index has tumbled over 3 per cent (year-to-date) from 92 to the current levels of 89. This has helped emerging market currencies gain strength against the US dollar. While emerging market currencies such as the South African rand, Brazilian real and Mexican peso have strengthened between 4 per cent and 6 per cent (year-to-date) against the US dollar, the Indian rupee has gained just 0.5 per cent so far this year. This reflects the inherent weakness in the domestic currency. It also increases the threat of the rupee getting beaten down more than other emerging currencies when the fall in the US dollar halts and the greenback regains strength.

Area of concern

The recent data release showing India’s trade deficit widening to a three-year high of $14.88 billion could be a major area of concern for the rupee to remain subdued against the dollar, going forward. The current account deficit (CAD) number from the Economic Survey released on Monday also reiterates the same concern.

The Survey shows that India’s cumulative CAD has widened from $3.8 billion in the first half of 2016-17 to $22.2 billion in the first half of 2017-18. Surge in gold imports and the rise in crude oil prices have been cited as the major factors for the CAD to widen this year. The Survey shows that gold and silver imports have surged 52 per cent to $29.1 billion in 2017-18 (April to December) from $19.1 billion last year. Oil imports have increased 24 per cent.

The rise in oil prices has been cited as one major risk for India’s external sector.

Watch gold and oil

But along with oil, gold is another important commodity which will also need a watch. The prices of gold and silver — the third-largest import component — are also on the surge.

The long-term outlook for both gold and oil are bullish. Barring some intermediate short-term price corrections, both these commodity prices are expected to surge further over the long term. So, further rise in the prices of oil and gold can see India’s import bill bulging, which, in turn, will see the deficit widening further.

Brent crude ($69 per barrel) is expected to remain above $60 and is likely to target $80 or even higher in the coming months. Gold ($1,345 per ounce) is likely to sustain above $1,250 and can target $1,450 or even $1,500 on a strong break above $1,380.

Higher oil and gold prices can keep the rupee under pressure.

Rupee outlook

Rupee has been stuck in a narrow range between 63.25 and 64.11 over the last three weeks. But the currency is more likely to break this narrow range as the coming weeks are packed with a slew of key events. The US Federal Reserve meeting is on Wednesday. This will be followed by the mega event on the domestic front, the Budget, on Thursday. The US unemployment numbers will be released on Friday.

The level of 64 is a crucial support for the rupee. The currency will come under pressure only if it declines below 64 decisively. Immediate resistance is at 63.5. A strong break above this level can see the currency strengthening towards 63.25 initially. Further break above 63.25 can take the rupee higher to 63. Also, from a medium-term perspective, as long as the rupee remains above 64, there is a strong likelihood of it strengthening towards 62.4 in the coming weeks.

This bullish outlook will get negated if the rupee falls decisively below 64. Such a fall will then increase the likelihood of the currency weakening towards 65 or even 66 levels again thereafter.

Published on January 29, 2018

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