Ner­vous­ness in ru­pee to rise as elec­tion ap­proach

DNA (Daily News & Analysis) Mumbai Edition - - FRONT PAGE -

TNARAYAN SA

he New Year saw the tem­po­rary res­o­lu­tion of the long­est US govern­ment shut­down in his­tory- move­ment for­ward on the Sino-us trade talks, a dovish slant to Fed­eral Re­serve com­mu­ni­ca­tion and a yet un­re­solved Brexit is­sue.

The US dol­lar in­dex stayed un­der 97 as the US Fed Re­serve is­sued a mod­est down­grade to growth and char­ac­terised in­fla­tion as muted. It promised data de­pen­dence, pa­tience on fur­ther in­ter­e­strate ad­just­ments and flex­i­bil­ity in bal­ance sheet nor­mal­i­sa­tion. This dovish slant re­duced the mar­kets’ prob­a­bil­ity of fur­ther rate hikes in 2019 to neg­li­gi­ble lev­els. The Sino-us trade talks pro­gressed sat­is­fac­to­rily while the US govern­ment was re­opened tem­po­rar­ily till Fe­bru­ary 15, for fur­ther ne­go­ti­a­tions on bor­der se­cu­rity.

The Euro’s un­sus­tained surge to U$1.15 was due to the ini­tial US dol­lar weak­ness. Euro­pean Cen­tral Bank (ECB) gover­nor Mario Draghi’s weak­en­ing growth as­sess­ment and a global pro­tec­tion­ism threat was con­firmed by weak man­u­fac­tur­ing data and Euro­pean Com­mis­sion 2019 growth down­grade. Draghi’s in­di­ca­tion to con­tinue the sig­nif­i­cant amount of mone­tary pol­icy stim­u­lus pulled the Euro back to­ward U$1.13.

The UK Prime Min­is­ter Theresa May lost the vote on the Brexit with­drawal bill re­sound­ingly but nar­rowly sur­vived the “vote of no-con­fi­dence” tabled by the op­po­si­tion Labour party, help­ing the pound scale U$1.32. While vot­ing on “Plan B”, the UK Par­lia­ment in­structed PM May to rene­go­ti­ate the exit treaty, which the EU re­it­er­ated it would not change. The pound dipped be­low U$1.30 as it also re­jected a plan to leg­is­late a de­lay to Brexit, even if PM May failed to se­cure con­ces­sions from Brus­sels, mak­ing a de­lay in the March 29 dead­line a dis­tinct pos­si­bil­ity.

From an early Jan­uary low of 69.23/$, the In­dian ru­pee de­pre­ci­ated lin­early to 71.83/$, on firm oil prices, ru­moured dol­lar pur­chases for de­fence pur­poses and a pop­ulist elec­tion year In­terim Bud­get.

The Bud­get had new farmer sup­port schemes, a pen­sion scheme for un­or­gan­ised labour, in­come tax re­lief for in­di­vid­u­als and sup­port for the hous­ing sec­tor. These sops ex­panded the fis­cal deficit tar­get to 3.4%, caus­ing bond yields to har­den. Later, the Re­serve Bank of In­dia (RBI) un­ex­pect­edly cut the repo rate by 25bp to 6.25% and changed its pol­icy stance to neu­tral. Its fore­cast of slower GDP growth and lower in­fla­tion has raised the mar­ket’s ex­pec­ta­tions of an­other 25bp cut in April.

The ru­pee is ex­pected to trade the 70.50-72.00/U$ range over the next few weeks, shad­ow­ing global risk ap­petite, oil prices and bond yields. Ner­vous­ness will rise as we near the gen­eral elec­tions in May with the RBI seek­ing to tem­per any two-way volatil­ity.

The writer is pres­i­dent­group trea­sury and re­tail broking, Ko­tak Mahin­dra Bank

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