There is almost a 75% chance that the rupee will depreciate towards the 81-81.50 levels, writes Amit Pabari of CR Forex Advisors.
The rupee broke 81 against the US dollar for the first time ever, following a new 20-year high in the dollar index after the Fed announced a 75 basis point hike in the key interest rate American. Stocks around the world fell sharply and US bond yields hit multi-year highs.
What does the way forward for the rupee look like?
Here is an overview of the main factors affecting the rupee at present:
USD stronger: After worse than expected US CPI data, US multiple returns hit their highest levels since 2007-2008, adding to the greenback’s appeal. The rally in the dollar index – which measures the US currency against six non-rupee peers – continued towards 111.5.
The revised dot plots suggest a further 1% rise for the year, which would take the terminal rate above 4%. We can expect the dollar index to rise towards the 112.5-115 levels in the medium term, and the euro and the pound to fall towards the 0.95 and 1.08 levels respectively.
Weaker emerging market currencies: Emerging countries are vulnerable to the appreciation of the dollar. However, the rupiah is down 8.4% year-to-date but still manages to fare better than emerging market currencies. The rupee’s immediate par – the yuan – is down more than 11% since the start of the year.
Recession fears: Nearly 89% of countries have inflation above 6%, including many developed countries. Almost all the major central bankers have raised interest rates at the expense of growth, unfortunately.
Currently, 80% of major economies are experiencing slowing real gross domestic product (GDP) growth.
The chances of a recession in Europe and the UK over the next year have increased significantly, which could lead to a spiraling effect on the financial market.
Widening of the trade deficit: India’s main concern is its trade deficit, which widened to a record $28 billion in a month, nearly double the usual $13-15 billion. However, some influxes over the past two months have taken some of that pressure off.
Once Foreign Portfolio Investors (REITs) turn bearish and start withdrawing their funds following rising US rates, the Rupee could come under pressure.
India bond inclusion: There has been a buzz in the bond market that India may finally be included in the JP Morgan Global Bonds Index-Emerging Markets, opening the door for an influx of foreign capital.
Any development could support the appreciation of the rupee to levels of 79.50-79.
Outperformance of domestic equities: While most global markets are down more than 10%, Indian equities are showing resilience, boosted by REIT inflows.
The consolidation over the past two months was surely a lull before the storm. The RBI was fairly controlling the currency to keep the interest of the foreign investor intact ahead of the bond inclusion talks. However, the Fed’s hawkish policy, including the 75 basis point hike, led to the Rupee falling to record lows.
The RBI may not be able to use foreign exchange reserves aggressively as liquidity in the banking system falls to a 40-month low. It may have to let the rupee fall to its fair value, in line with emerging and developed market currencies. With a stronger dollar, falling EM currencies and a lackluster global situation, the rupee may no longer be an outlier.
There is almost a 75% chance that the rupee will depreciate towards the 81-81.50 levels. The only thing that could push the USD-INR pair back to levels below 80 is the news of India’s inclusion in the bond index, which could push it into the 79.5-79 band. But the odds of that happening appear to be bleak.
–Amit Pabari is Managing Director at CR Forex Advisors. The opinions expressed in this article are his own.