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Indian Rupee: Reeling under the impact of global turmoil

Rupee has breached its major support level of 66 to a dollar, couple of days back. The overall fashion in which the rupee has declined, leaves room for further weakness in the Indian currency.

September 09, 2015 / 05:38 PM IST
Sugandha Sachdeva
Religare Securities

It was difficult to find a currency in the emerging markets that stood tall against the might of the US dollar after China surprised the markets with its decision to devalue its currency. The Indian rupee too became a victim of Yuan depreciation and the global meltdown in equity markets. China's central bank devalued its tightly controlled currency against the dollar, that led to its biggest one-day loss in two decades, as the growth in the world‘s second largest economy stalled. The poor trade numbers seemed to be the final nail in the coffin for China's tolerance of a strong exchange rate, in the face of sluggish demand for its exports. Chinese exports fell 8.3 per cent in July; this was the biggest drop in four months and was far worse than expectations for a 1 per cent fall. The devaluation was allowed to make China's exports cheaper and gain a competitive edge. In spite of the several easing measures, China was tightly managing its currency, which was hurting its economy.This is in stark contrast to the kind of depreciation that we have witnessed in Yen and EUR in the past one year, as a corollary to the massive stimulus programs announced by BOJ and ECB respectively. China finally had to concede for Yuan devaluation and make it more market driven, in the face of GDP numbers which have dropped to near 7%, from around 10% growth it registered in the period of 1991-2011. Their focus now is to boost growth by again turning to export-driven model from the consumer-driven model, and Yuan devaluation seems to be a catalyst in that direction.

The cascading effect of Yuan deprecation was seen on our rupee too, as it overshoot the support levels and fell to its two year lows. Even the fall in crude oil prices could not help the Indian rupee as china’s currency devaluation sent jitters across the global markets. In the process, rupee has fallen more against the dollar as compared to Yuan’s fall versus the dollar. The major reason being the concerns that weaker Yuan would hurt our domestic exports, which have already seen a slump for the last 8 consecutive months, as they lose their competitive advantage in the wake of a weaker Yuan. Also, India already runs a massive trade deficit with China and weaker Chinese currency would further aggravate the situation.

It was last in 1994, that we had seen Chinese Yuan losing its value by 33%, and in case the current downdraft is just the beginning, it may cast a further negative spell on the Indian currency, going forward. But is Yuan devaluation the only factor weighing on the Indian rupee?

The other major concern that’s posing a risk to our rupee is the anticipation of an  interest rate tightening cycle in the US, that has sent the dollar index scorching to multi year highs. The analogy can be best understood as an interest rate hike in the US will lead to capital outflows from emerging markets and strength in dollar against a basket of currencies. Indian rupee too cannot live in isolation and will certainly lose value.

Also, the recent economic data have been quite downbeat. India’s gross domestic product (GDP) growth came in at 7 per cent in the April-June quarter, lower than the 7.5 per cent growth registered in the preceding quarter. The fiscal deficit in the first four months of current financial year stood at Rs.3.85 lakh crore , or 69.3 per cent of the budget estimates for 2015-16. The ailing rupee though, got some boost as the government decided to exempt foreign investors from Minimum Alternate Tax claims prior to April 1,2015.

On the other hand, Indian economy has got the main comfort in the form of fall in crude oil and other commodity prices, which has resulted in shrinking of our current account deficit and inflation cooling off significantly. Also, we have a strong buffer from our high foreign exchange reserves which has helped the Indian rupee to fare better vis-a- vis other emerging market currencies. But, in case there is a rebound in crude oil or other commodities, Indian macro economic factors may take a turn for the worse.

Talking about the overall outlook, rupee has breached its major support level of 66 to a dollar, couple of days back. The overall fashion in which the rupee has declined, leaves room for further weakness in the Indian currency. In case the local unit closes below the 67 mark, depreciation up to 68 levels  is on the cards in coming days. However, a small retreat  towards 65.50 seems plausible, as the US Fed might refrain from raising rates at a time when the outlook for global growth has worsened and dollar is also strengthening. This may cap risk aversion in the markets and underpin the currency in immediate short term. Meanwhile, one should keep a keen eye on further developments in the upcoming US Fed meet.
first published: Sep 9, 2015 05:38 pm

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