Rupee slide to continue; see 65/$ by year-end: ANZ Research

Q: It’s been slightly rocky for the rupee in the last couple of days but that is because the dollar index has also been moving northwards. What is your assessment of whether we can expect more weakness on the rupee going ahead?

A: We expect further dollar strength going forward as we get closer towards the Fed normalising policy. The real reason why the US dollar strengthen over the last few days is because Janet Yellen in her speech last week made it clear that the Fed is still on track to hike interest rates this year. This despite the weakness in the economic data that we have seen.

Shortly after her speech we started to see signs that indeed the US economy is starting to rebound from its temporary weakness in the first quarter and that has given a dollar boost, the catalysts, they need to go out and buy dollars and push it higher.

As we see further evidence that the US economy is rebounding, it brings the Fed into play for September and that will led to further US dollar strength.

If the dollar is strengthening then it is hard for currencies to buck the trend and it includes the Indian rupee. So despite much better fundamentals the rupee is still expected to slide against the US dollar.

Q: About two-and-a-half months ago the dollar index had gone to levels of 100, breaching the three-digit mark in a decade or so. Do you see this dollar strength taking the dollar index to levels of 100 plus? What would be your near-term target, medium-term target?

A: The US Dollar Index (DXY) is certainly on track to breach the 100 level but we shouldn’t just focus on the DXY because the DXY is quite a narrow basket. I think we are going to see more dollar strength against emerging market economies and that’s where we should focus on. This is because while we have seen dollar strengthening against G10 currencies, there is further dollar strength to come against selected emerging markets particularly those that have weak fundamentals.

India was one of the fragile five in 2013 but they are no longer part of that group this time around because of the improved fundamentals. But there are still other EM countries that have fundamentals that put their currencies at risk of further depreciation against the US dollar.

Q: You did mention that despite the rupee being fundamentally very strong just because of the dollar index surging the rupee could be under pressure but what kind of pressure are you expecting in the next two-three months?

A: The rupee may depreciate towards 65/USD by the end of the year. We are already at 64/USD, so it is not a great deal of depreciation and indeed I expect rupee to outperform other emerging market currencies as I expect other EM currencies to come under even further depreciation.

I think part of the weakness that we are seeing in rupee is that we are seeing foreign investors taking profit and selling out from Indian equities and also from the Indian bond market.

We had record foreign inflows into India since the Modi election victory a year ago and we are starting to see some of that unwind which is placing the downward pressure on the rupee that we see. I think those outflows eventually should ease off. Hence taking a bit of pressure off but I still see the rupee going to a slightly modest depreciation trend against the US dollar.