Rupee likely to head higher towards Rs 69/USD mark by the end of July ’18

Prathamesh Mallya

India’s trade deficit has become a grave cause of concern as rising oil prices weighed on the economy since oil imports jumped to USD 10.4 billion in April 2018; up 41.45 percent from April 2017.

This has led to a depreciation of 6.6 percent in Indian Rupee YTD in 2018. Also, Indian equity and debt markets have witnessed fund outflows of Rs 537 crore and Rs 32,416 crore so far in 2018.

In order to counter the rising inflation, RBI decided to hike interest rates for the first time in four years by 25 bps to 6.25 percent in their recently held meeting on June 6, 2018.

Having said that, the Reserve Bank of India (RBI) maintained a neutral stance on the monetary policy and MPC estimated CPI in the range of 4.8-4.9 percent in the first half of 2018 and 4.7 percent in the second half.

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Prathamesh Mallya

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International factors too, have not been supportive of the domestic currency as US dollar index strengthened around 2 percent amidst robust economic data.

Inflation in the US has consistently been above US Fed’s target range of 2 percent in 2018. To compliment this strength in consumer inflation, the US has been able to add on an average of 191,000 jobs every month in 2018 (January 2018 - June 2018) as compared to 177,000 every month in the same period last year.

In June 13 FOMC meeting, Federal Reserve decided to increase interest rates by 25 bps for the second time in 2018 citing their confidence in the US economy.

Meanwhile, ECB too has geared up in the race with other central banks; officials from ECB could give hints about the winding up of the stimulus citing robust growth in the region.

ECB member Weidmann also commented that a rate hike could follow post the end of the QE program. In addition, Euro gained traction after political uncertainty in the region which was evident in the last few months eased out as a new government was formed in Italy with Gisueppe Conte being sworn in as the Prime Minister.

Rupee likely to weaken further:

Despite the recent recovery in USD/INR in the past one month from 67.77 to 67.64, the US Fed’s forecast to raise interest rates two more times eyeing strength in the economy is likely to add strength to the US dollar.

Also, US Treasury yields have been near their 5 years high at ~ 3 percent mark adding further strength to the US dollar.

Besides, if ECB fails to live up to the market expectations of a more hawkish stance and a definitive period for the end of QE, this would again lead to strength in US dollar and in turn weakness in Indian rupee.

The factors cited above are likely to take Rupee (CMP: 67.94) higher towards the 69 mark by the end of July ’18.

(Disclaimer: The author is Chief analyst, Non-Agri Commodities, and Currencies at Angel Broking. The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.)