Momentum may take Rupee towards Rs 76/$ levels: Abhishek Goenka

Abhishek Goenka

On Thursday (March 19), the Indian Rupee nosedived to a new historic low ending the session at 75.00. In the calendar year 2020, the Rupee has eroded 5 percent of its value against the US dollar ($), gyrating from best performing Asian currency to one of the worst performers.

The sudden sell-off can be attributed to huge foreign portfolio outflows from the domestic assets amid rising coronavirus (COVID-19) cases. Foreign Institutional Investors (FIIs) have sold a net of $11.77 billion in equities and debt segment in March till date. Indices have lost 35 percent from the 2020 highs. Extreme risk aversion and scout for the US dollar from all over the world further weighed on the domestic currency.

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Abhishek Goenka

Founder & CEO|IFA Global

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Not cutting rates, coupled with the injection of Dollar liquidity through S-B swaps has kept the carry intact. Elsewhere there has been a massive Dollar shortage. It has intervened verbally, through futures and likely even in the offshore market which is unprecedented.

Currencies of economies that have cut rates have exhibited more volatility and have depreciated more viciously. Even the safe havens are now taking a hit against the king dollar. Investors are pulling out funds from all the financial markets and want to hold their money in dollar terms amid prevailing uncertainties and recession fears.

Emerging markets' (EM) currencies are under tremendous pressure on account of outflows. Further, EM nations slashing rates is likely to lower their carry advantage.

Tailwinds from crude have also helped but in past instances when we have seen extreme risk aversion, we have had phases in which crude tumbles and Rupee will also depreciate.

The RBI on March 19 it stands ready to intervene in the foreign exchange (FX), Bond and money markets. When the Rupee was in a range, the RBI was bolstering it's Reserves. Our Reserve cover for imports and short term external debt is more comfortable than ever before.

The RBI has ensured that adequate Rupee liquidity is available in the banking system by way of Long Term Repo Operations (LTROs). It has replenished the Rupee liquidity that has been taken out through FX intervention.

Off late, we have seen a massive sell-off in corporate bonds on account of redemption pressure. Spreads have widened even for good credits and maybe that is one area that the RBI may now look to address.

The reaction function of the central bank would be interesting to watch given that there is broad Dollar strength and Rupee is not moving out of whack. Another 2 percent runaway move in $-Rs pair is on the cards in the absence of RBI intervention.

Technical factors suggest the current bullish momentum to continue targeting 76 plus levels. Currency depreciation pressure and falling crude oil price should bode well for rate cuts in the upcoming monetary policy meeting.

The author is Founder & CEO, IFA Global

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