Lower support for the rupee is at Rs 70.50 and medium-term bias (for next 1-2 months) remains bullish above the same with test of the ‘Cup & Handle’ target of 74.20 looking likely, says Navneet Damani of Motilal Oswal Financial Services.
Motilal Oswal Financial Services“India in uproar over rupee’s fall” - was the headline in The Washington Post in August 2013, we are now again looking at similar headlines exactly after five years. Many of us are wondering, is it the same story or its
different this time.
Let’s have a look at the situation back in 2013 - In May 2013 the rupee was trading at Rs 56 to a dollar, and the situation didn’t look threatening at all, with the world still enjoying the liquidity provided by the US bond purchase program - Quantitative Easing (QE). But the boat was rocked by the then Fed chairman Ben Bernanke, who put out an optimistic picture about the US Economy and announced that the Fed would soon be looking to stop the QE. This created a watershed moment for all the emerging market (EM) currencies as the funds started to pull out investments from EM debt as well as equity which was accompanied by a surge in oil price, leading to demand for dollars sky rocketing. It soon became a vicious circle for the emerging market currencies like Indian rupee as by now more and more investors started to pull out capital from because the rupee was depreciating sharply and as more capital outflow caused further depreciation.
Government and RBI fumbled with many short term measures like import duty on gold, rising interest rates and interventions by RBI to supply dollars but despite that the rupee depreciated to Rs 68.83 by end of August 2013.
Coming to the present, we have seen the rupee depreciate from Rs 64 per dollar at the beginning of January 2018 to Rs 72.91 per dollar by the mid of September, which makes it 14 percent in 8 months. Though it can’t be compared to the carnage we have witnessed in 2013, but the uproar among the investors and importers seems to mimic the pain.
The problem like most other times is that the sudden depreciation, especially the Rs 6 per dollar fall in three months between June and August, caught many importers and analysts’ off-guard.
Most of the analysts (including us) were sitting duck this time as there were no warning bells. If we see the situation in 2013 discussed above compared to now, the most important external factor the markets were worried about was the Fed tightening, but this was going on the most anticipated path without any major surprise and was well discounted.Domestic Headwinds
Besides the capital outflows the twin-deficits were to be blamed for such a rout in the rupee in 2013 along with higher inflation. Inflation is a tricky thing as it sometimes causes depreciation of a currency and sometimes is arises out of the depreciation of a currency.
The inflation was in double digits back in 2013 and hit a high of 12.17 percent in Nov 2013, we are nowhere near to that currently, with inflation comfortably under 5 percent. The only factor which is close to levels of stress in 2013 is the trade deficit which is now close to $18 billion just shy of $19.37 billion in May 2013, and peak of $20.21 billion of October 2012.
The major reasons behind this surge in trade deficit is the rise in the Crude oil price, Brent crude is now trading near $78 in 2018 against $58 seen in September last year a move of over 34 percent.Since Mid-2017, the long term import contracts get re-priced we are witnessing the lag effects of the rise on the import bill for recent months. Despite that, crude remains second on the import growth numbers which is
topped by of gems and jewellery sector which has topped with fastest growth YoY.
Surprisingly according to world gold council data the demand for gold in India has declined by 8 percent in Q2 CY2018, and the import growth is triggered by the precious stones causing capital flight through the sector.We have also seen a steep decline in agricultural exports as the subdued global prices for commodities like Sugar, Soymeal have limited our options to export, and we have also lost some of our market for textiles to competition. Most of these challenges are structural in nature and can only be corrected through policy changes over the long term. So we do not see
any turn around in this, but hope the deficit could be curtailed in high value segments like gems and jewellery.The next thing to watch out for is the overall current account deficit (CAD),
which hit 6.7 percent in December 2013, but currently it stands close to the
2.4 percent (RBI comfort level is 2.5 percent), but with no concrete plans of disinvestment, falling or stagnant revenues from GST and the upcoming election season could make the government miss the targets considerably.
The market is already showing nervousness about the same and expects CAD to expand close to 2.8 percent of GDP.
Finally, the economy both domestic as well as global economy are showing much healthy growth with GDP growth touching 8.2 percent (the rate of economic growth was 5 percent in 2012-13, the lowest in a decade), we should be able to manage this crisis much better than the one in 2013.Outlook
We do not believe that we have hit a similar panic what we have seen in 2013, and see ourselves standing on a much stronger footing this time.
However there are some short term headwinds in the form of rising crude oil prices, slippages in inflation expectations, funds outflow by FPIs and slowdown of flows from FIIs - which has been supporting the currency over the last couple of years, and more importantly the upcoming state and central elections over the next six months, which could keep the rupee volatile.For importers, we advise to stay covered as there could be some ongoing pain for the next few months. Exporters, who have been enjoying this slide in the rupee, could now fasten their seat belts as the risk rewards is now tilting, and we advise them to cover partial positions at current level and
continue increasing their hedge on meaningful upside.
USD/INR has rallied almost 6.5 percent in the past one and half months testing a new life-time high at 72.91 after successfully breaching strong resistance at 68.50. However, the pair failed to breach long-term channel resistance and has recently corrected by about 1.5 percent from the top.
Looking ahead, the recent high is likely to pose short-term resistance to the pair and consolidation within support at Rs 70.80-71.30 and resistance at Rs 72.50-72.90 zone could be expected for the next 1-2 weeks.
Meanwhile lower support is at Rs 70.50 and medium-term bias (for next 1-2 months) remains bullish above the same with test of the ‘Cup & Handle’ target of 74.20 looking likely.
Only sustained break of Rs 70.50 would point towards a bigger correction in which case the pair could decline towards major support at Rs 68.50.Disclaimer: The author is VP- Commodity Research at Motilal Oswal Financial Services. The views expressed by experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.