Rupee may still depreciate

The ratings upgrade by Moody’s will bring a new class of investors in the country, so far restricted by their investment mandate of not investing in countries below a threshold.

That should strengthen the rupee naturally, but it may not be desirable for the central bank.

To maintain the country’s competitiveness, the Reserve Bank of India (RBI) might still want to see the rupee a little weak vis-á-vis its export competitors, revealed a Business Standard poll of 10 senior treasury heads and economists.

That usually means the central bank will have to intervene in the market to keep the rupee weaker than its actual strength.

Foreign exchange reserves, which recently crossed $400 billion but have come off since then a bit, should get a strong boost as a result of the intervention, they said.

However, in the short term, the rupee will maintain a strong bias. Ultimately the rupee’s fate is still tied to what happens to the dollar globally. The dollar index, which measures the greenback’s strength against major global currencies, has fallen rapidly in the past one year, from 102.5 in January to 93.7 level now. Emerging markets currencies have strengthened as a result, and the rupee has more often than not led the pack. This is not a comfortable position for the central bank when the trade deficit is widening.

The intraday movement in the rupee also offered some clue in that reasoning. On news of the update, the offshore rupee market swung into action and pushed up the exchange rate to 64.78 a dollar level. In the domestic market, the rupee opened at 64.75 and strengthened to 64.63 before closing at 65.01 on RBI intervention. Abhishek Goenka, managing director and chief executive officer of IFA Global, a currency consultancy firm.

The rupee’s real effective exchange rate (REER), on a 36-currency basket basis, was at 119.57, while on a six-currency basket (global major currencies) basis the REER was at 128.86. Anything above 100 is considered overvalued.

“Even before the upgrade, the rupee was one of the best-performing emerging markets currencies. We expect the momentum to continue after the rating upgrade,” said Saugata Bhattacharya, chief economist of Axis Bank.

There are also a number of experts who expect the rupee to gradually depreciate from the present level.

“We expect the rupee to depreciate from here as global market fault lines show up. Hawkishness by the US Fed and European Central Bank, US tax reform are dollar-positive and emerging markets negative,” said Samir Lodha, head of QuantArt Markets Solutions, a treasury consultant, adding India’s widening trade deficit and chances of carry trade unwinding potentially can hit the rupee hard.

Lodha expects the rupee to be in the 66-67 range in the coming months.

Ajay Mahajan, head of commercial and wholesale banking at IDFC Bank, expects the rupee to be in the range 66-67 by March, basing himself on the belief that the initial euphoria would settle on the face of challenging global macroeconomic conditions.

“INR in the short term would remain sensitive to the movements in the US dollar index, which has become very volatile of late. Trends in crude prices and the likely fiscal slippages will lead to a gradual depreciation of the rupee,” said Rupa Rege Nitsure, group chief economist of L&T Finance.

Shubhada Rao, chief economist of YES Bank, said the rating upgrade and the ensuing policy reforms would give stability to the rupee, but it might touch 66 in the next two-three quarters.