India Rating has come out with its report on Rupee. The research firm expects the Indian rupee (INR) to appreciate to 59-61 against the US dollar (USD) by end-March 2014 (FYE14).
India Rating`s research report on Rupee
INR to Appreciate by FYE14: India Ratings & Research (Ind-Ra) expects the Indian rupee (INR) to appreciate to 59-61 against the US dollar (USD) by end-March 2014 (FYE14). The expectation is based on recent policy measures taken by the Reserve Bank of India (RBI), resumption of capital inflows, passage of economic reform bills in the recently concluded parliament session, lower current account deficit (CAD) in FY14 and pick-up of economic growth momentum from Q3FY14.
General Emerging Market Phenomenon: All emerging market currencies have depreciated since January 2013 and have fallen steeply since mid-May 2013 due to an expectation of a roll back by US Fed on its monthly bond purchase programme. Currencies of emerging markets with high fiscal and CAD depreciated more than other emerging markets. The phenomenon was not only limited to emerging markets; the Australian dollar also depreciated 13.9% between 1 January 2013 and 31 August 2013.
Capital Inflows: Currency movements depend on internal (fiscal) and external (current account) balances. In presence of CAD, sudden currency movements largely depend on the type of sources that are funding it such as debt-creating capital inflow, volatile portfolio investments or stable foreign direct investment (FDI). The currency movements over January 2013-May 2013 were more driven by fundamentals, while those over May 2013-July 2013 were due to the outflow of portfolio investment triggered by the tapering off of US Fed bond purchase programme.
Speculation: The sharp INR fall in August 2013 to 68.34/USD was essentially marked by speculation of extremely high volatility and very low to thin trading volume of the currency. We understand from issuers/market participants that trades of even USD1m-USD2m were difficult to execute.
Ballooning Current Account: CAD deteriorated to 4.8% of the gross domestic product (GDP) in FY13 from 4.2% in FY12. This can be attributed to the fact that India is a net commodity importer and relies heavily on imports for meeting its energy (crude and coal) needs. Another commodity that has added to the woes lately is gold imports (hedging against inflation). A rise in legal issues related to iron ore and coal mining also resulted in higher CAD.
Weakness of Indian Economy: Since Q1FY12 changes in forex reserves have been lower than the quantum of CAD. Low net addition to forex reserves signifies structural weakness in the Indian economy. This, along with global developments such as the eurozone debt crisis, the possibility of a breakup of the eurozone and tapering off of quantitative easing (QE) by the US, has resulted in a sharp INR depreciation since August 2011.
Global Liquidity and Strength of USD: Since 2000, global liquidity has remained comfortable and a major portion of this liquidity has been invested into the emerging economies for better returns. While this helped emerging markets to reap its benefits leading to a phase of high economic growth, it also exposed them to the upheaval of the global financial markets. INR depreciation therefore tracks the appreciation of USD index quite closely.
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