Portfolio

The road ahead for rupee in 2020

Akhil Nallamuthu | Updated on January 22, 2020 Published on January 22, 2020

INR was one of the weakest Asian currencies in 2019

The year of 2019 kept the currency market busy, shifting between a risk-on and a risk-off sentiment on the back of central bank actions and geopolitical events across the globe. The rupee (INR) lost 2.3 per cent against the dollar (USD) last year.

While this may seem better compared with its performance in 2018, where the Indian currency lost 9.2 per cent, it largely remained one of the weakest Asian currencies in 2019.

Compared with other major currencies, the rupee lost 0.23 per cent against the euro (EUR), 5.97 per cent against the British pound (GBP) and 3.45 per cent against the Japanese yen (JPY).

Record inflows

As per National Securities Depository Ltd (NSDL) data on Foreign Portfolio Investment (FPI), the domestic market received a net inflow of nearly ₹1.36 lakh crore (equity and debt combined) in 2019 compared with a net outflow of ₹80,919 crore during year 2018.

According to RBI data, India received increased Foreign Direct Investment (FDI) inflows during the January-September period last year compared with the corresponding period the year before — FDI increased to $27.2 billion from $23.9 billion.

During the same period, External Commercial Borrowing (ECB) by corporates also increased the demand for rupee. ECB inflows saw a significant jump to $16.7 billion compared with a meagre $1.5 billion the year before.

The Balance of Payments (BOP), too, improved. The Current Account Deficit (CAD) during January-September in 2019 narrowed to $25.2 billion from $47.8 billion during the same period in 2018. Trade deficit, the largest component of CAD, contracted to $119.5 billion from $137.4 billion as imports for the period decelerated, while exports remained flat.

What weighed?

One of the factors that might have weighed on the rupee could be the increasing trend in Consumer Price Index (CPI). The inflation spiked to 7.35 per cent in December from 1.97 in January. Another factor could be the reduction in the benchmark rate by the Reserve Bank of India. The RBI reduced repo rate by 135 basis points from 6.5 per cent to 5.15 per cent in 2019.

Importantly, India’s forex reserves increased by $61.6 billion to $454.95 from $393.29 billion in 2019, meaning the RBI had been buying the dollar, thereby keeping a check on the rupee to support exports.

Inflation on an upward path can have a negative impact on a domestic currency. So, the RBI may not opt for further rate cuts if the inflation continues to head north.

While the rising inflation can exert pressure on the rupee, the Indian central bank restraining from further rate cuts can be favourable to the local currency, as higher interest rates can attract capital inflows. This is especially true, considering that the US Federal Reserve is expected to keep its policy rate at current levels (1.75 per cent) throughout 2020 as per the latest dot plot.

While the slowdown in the domestic economy might translate to lesser imports, a continued weakness in global demand could dent the scope for exporters. Contributing to the uncertainty in the global situation is the rising protectionism, cites Federation of Indian Export Organisations (FIEO). However, in “India’s exports outlook”, FIEO forecasts exports to pick up in the first half of 2020, auguring well for the rupee.

India, being an import-dependent nation in crude, the global price trend in the commodity is always a concern for the country’s foreign exchange. Compared with the 2019 average price of $56.74 a barrel, the US Energy Information Administration (EIA) expects the average price of West Texas Intermediate (WTI) oil to drop marginally to $55.01 a barrel in 2020. Consistent supply and a projected increase in inventories are expected to put a cap on crude prices, thereby not threatening India’s crude bill.

Market sentiment is a major contributor to short-term volatility and price trends. Tensions in West Asia is ebbing away and Brexit has not been a disruptor so far.

Then there is the trade deal between the US and China. Now that the ‘Phase 1’ deal has been signed, the likelihood of a trade conflict henceforth seems low.

All these factors should help improve the market sentiment, resulting in a demand for riskier assets. That would mean more inflow to India, keeping the rupee afloat.

Outlook

While inflationary risk persists, comparatively high interest rates will provide cushion for the Indian currency. The other factor in favour of the rupee is a possible improvement in trade balance on the back of better exports and subdued crude oil prices.

As foreign exchange reserves are at record levels, any unexpected spike in the exchange rate would be effectively managed by the RBI. On the other hand, the RBI might also avert a sharp surge in the rupee to maintain competitiveness in the global market. Considering these factors, the rupee is expected to largely stay within 69 and 72 against the dollar during the year.

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

Published on January 22, 2020
This article is closed for comments.
Please Email the Editor