Motilal Oswal
In the last couple of months, rupee has been consolidating in a broad range of 74 and 76 despite sharp gains in domestic and global equities. One of the major reasons for the rupee appreciation has been the rush of flows into Indian equities.
Fund inflow in the equity segment has been to the tune of USD 4.9 billion in the last three months and a few big corporates have raised dollars via stake sale. Reliance being the major one has managed to raise over Rs 1 lakh crore by stake sale in Jio leading to a surge in the rupee. If its the flows that have lead to a higher rupee, RBI, on the other hand, has been intervening consistently to restrict any major appreciation.
Latest RBI data suggest that the FX reserves are at record levels of USD 516 billion and looking at the current trend it seems that RBI is in no mood to slow down the pace of dollar purchases. Market participants are also keeping an eye on the ongoing tension between India and China as it could disturb the overall market sentiment in the short term.
On the domestic front, widening fiscal deficit is also a major concern after government expenditure increased following the COVID impact. In the first two months of FY21 fiscal deficit has widened to 59 percent of the budget estimate for the full year.
The government’s fiscal deficit target estimated in the Union Budget 2020-21 was Rs 7.96 lakh crore, or 3.5 percent of the GDP, but is likely to be revised due to the coronavirus' impact on the Indian economy.
India posted a trade surplus of USD 790 million in June, it’s first in over 18 years, with imports plunging as the coronavirus pandemic depressed domestic demand for crude oil, gold and other industrial products, reflecting a slowing economy.
Imports of crude oil, electronic items, gold jewellery and other products fell sharply during the three months to end June. Data showed total merchandise imports fell by more than 50 percent to USD 60.44 billion during the April-June quarter while exports were down 36.7 percent from the year-ago period to USD 51.32 billion.
Looking at the overall domestic scenario, it seems that despite weaker-than-expected growth number fund flows continue to attract in both primary and secondary market. This probably is one of the reasons why the street has been buzzing despite the lockdown since the end of March.
So far, the M&A deals in 2020 have crossed USD 32 billion. Reliance alone has raised over USD 20 billion and many other corporates have raised money via stake sale. Among the deals underway, a few are in pharma, tech and digital services. Buyers see these as fundamentally good assets, neutral-to-positive in terms of COVID impact, with a favourable market trajectory.
These factors are likely to keep the currency supported but we expect that the momentum for appreciation could be curbed as the central bank would not be comfortable in keeping the currency very strong when it wants to boost its exports.
US and China spoiling the stimulus party!!!
Uncertainty between the US and China and escalation of tensions between the two major economies are likely to impact the global growth which is starting to recover after major central banks announced stimulus packages.
Shutdown in major economies has derailed global growth to a far extent and major central banks are still pushing to infuse more liquidity to stimulate the economies. The US is considering one more stimulus package worth over USD 1 trillion and this liquidity easing is expected to keep the dollar weighed down against its major crosses.
In the last few months, major central banks have pledged to keep rates low and also announced massive stimulus programs to support the economy. Is the package enough only time will tell and equity markets across the globe have cheered as most witnessed sharp surge.
In the recent past, what could play a spoilsport is the increased uncertainty between the US and China and the fear is clearly getting reflected in gold prices. There is also a group who expects that the stimulus may fail and which might lead to dire consequences on the economy.
Where is rupee headed?
Dollar in the last few months has been under tremendous pressure as major central banks either cut rates or introduced stimulus packages. RBI too since the start of this year has cut rates, but since the end of March it has primarily been flows that extended gains for the currency. In the coming meeting, RBI is expected to take a pause, but one more rate cut cannot be ruled out in the next couple of meetings. So broadly the central bank is expected to remain dovish but is likely to introduce new measures to support the economy.
At the same time, if the tension between the US and China escalates we are likely to see increased volatility for major currencies. As far as rupee (Spot) is concerned we expect it to trade higher in the near term following broad weakness in the dollar and could test levels of 74-73.50 but our overall view remains negative for the rupee in the coming quarter. On the lower side for the rupee we expect 76-76.50 to be an important support.
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