Where is the rupee headed?

Lokeshwarri S K | Updated on January 23, 2018


The rupee gave the markets a jolt by slipping sharply. The reaction of the stock market with the Sensex losing 2 per cent in the last two sessions highlights the significance of the currency in determining the health of the economy as well as companies.

It is the rupee that will bear the brunt if the Federal Reserve begins monetary tightening. There is no doubt that once US interest rates start moving higher, dollar will move up as money starts moving into US treasury instruments. Yields on US government securities will also spike on expectation that the Fed could then start selling the long-term securities bought as part of the QE program.

This will result in money from global emerging market debt moving to US bonds, applying pressure on the currency. But the rout this time is not likely to be as intense as that experienced in 2013 for various reasons. One, forex reserves are currently at a healthy $353 billion, up from the low of $275 billion hit in June 2013. The central bank has been buying dollars continuously in recent times, making use of rupee’s recent strength. These reserves are enough to finance 10 months of imports. The cover to debt at 71 per cent, while not too good, is not too much of a worry.

Two, in 2013, India’s current account deficit was spinning out of control.

It stood at 5 per cent of GDP in June 2013 due to increase in gold imports and high cost of crude imports. But thanks to initial curbs on gold imports and decline in crude oil prices, CAD has now been reined in at 1.36. India is one of the few countries with positive real yield above 3.9 per cent. This makes Indian debt attractive to debt investors compared to other countries such as China (2 per cent), Indonesia (1.5), and Malaysia (0.9) and so on.

With India being a net commodity importer, the fall in commodity prices has been favourable to our country when compared to commodity exporting nations whose growth for 2016 has been pegged back by the IMF.

India is, therefore, set to emerge as the country with the highest economic growth in the next couple of years. This superior growth will continue to attract long-term portfolio and direct investors into the country, thus cushioning the currency over the long term.

However, these factors have resulted in the rupee being overvalued with respect to its trading partners. The 36-country Real Effective Exchange Rate (REER) is currently at 111.9 implying that the rupee is currently overvalued by around 12 per cent. Depreciation of this magnitude will help make the country’s exports more competitive.

On the charts

The rupee is appearing weak, having declined below 65 recently. But the movement since the fall of 2013 appears to be a long-term consolidation phase that can make the currency move in the range of 58 and 68.

There is immediate support in the zone between 65 and 66. A halt there can make the rupee move between 58 and 66 over the next year or two.

If the previous life-time low at 68.8 hit in August 2013 is re-tested in this turbulence, the range can widen to 58–70.

But it needs to be noted that the retraction from the 68 level was swift in 2013. After hitting the intra-week low of 68.6, the currency closed at 65.2 in the same week.

This low can hold in this correction too. Else, the next support zone is between 70 and 72.

Published on August 23, 2015

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