Rupee woes: Fund managers expect rupee to touch 75/dollar soon

The Indian currency is making history almost on a daily basis. It opened at a fresh record low of Rs 73.81 against the US dollar on October 3 and is soon expected to breach 75/dollar, fixed income fund managers said.

Domestic equity fund managers are expecting the rupee to touch 75 per dollar if crude prices continue to inch higher.

The rupee, which inched towards 74 against the dollar on October 4, has depreciated by about 14 percent against the dollar while comparable currencies such as the Indonesian Rupiah and the Philippine Peso have depreciated 8.2 percent and 6.7 percent, respectively.

“Rupee's fall is in line with the other emerging market economies and it can easily touch 75 a dollar. In the last 3-4 years rupee has not depreciated significantly. So, the government is pretty comfortable with the fall in Indian unit as the government’s intention is to increase exports and reduce imports which will help is narrowing the current account deficit,” said Murthy Nagarajan, head-fixed income at Tata Mutual Fund.

Moreover, crude oil prices continued their northward journey. Oil prices fell from four-year highs reached the previous session today, pressured by rising US inventories and after sources said Russia and Saudi Arabia struck a private deal in September to raise crude output.

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Brent crude oil futures were down 16 cents at $86.13 a barrel today, having risen to a late 2014 high of $86.74 the day before.

Fund managers feel that the Reserve Bank of India (RBI) could raise policy rates by 25 bps in its next policy meeting as against general consensus view of a status-quo.

They also said that the central bank would want to give out a signal to the market that it is taking the necessary steps to control any possible inflationary pressure build-up, which is necessary from the rupee depreciation point of view.

Agreeing with Nagarajan view, Mahendra Jajoo, Head-Fixed Income at Mirae Asset Global Investments, said: "Rupee's current fall is broadly in line with the ongoing turbulence in emerging market currencies and rise in the global bond yields."

He added: "Government is also taking effective measures. First, they introduced 5-point measures to facilitate forex inflows. Then it increased the import duty on certain non-essential items. Now it allowed OMCs to do ECB and so on. Government is watching Indian rupee movement on a broader level and seems in full control of the situation."

Jajoo also expects the RBI to hike rates on Oct 5 and hopes that the central bank will give a clear signal if the monetary policy will be a tool used for defending the rupee.

Debt fund managers also expressed concern that rising global crude oil prices may expand the already large current account deficit and spur inflation worries, due to persistent weakness in the rupee against the US dollar.

They feel rupee could underperform its EM peers if crude prices remain elevated. They also cautioned that a balance in monetary policy has to be struck, to prevent slowing growth and rising inflation.

India clocked a GDP rate of 8.2 percent for the quarter ended June, supported in part by the low base effect of the same quarter last year, leading to the expectation of a 7.6-7.7 percent GDP growth for FY19 is the sign of a strong economy.

But, concerns over twin deficits, thanks to rising in crude oil prices and bond yields, which touched 8.11 percent and widening of current account deficit, which touched 2.4 percent of the gross domestic product in April-June quarter, are leading to some nervousness.

A rise in the current account deficit means that the country is importing more than what it is exporting which could lead to further pressure on the currency.

Asset managers feel that the macro situation has deteriorated and said that a rise in current account deficit could lead to further weakness in the currency.