Global cues to help in rupee recovery

Rupee appreciated by nearly 4 percent from Oct’18-Dec’18. The turnaround in rupee was mainly on account of softening crude oil prices which led to domestic inflation cooling down during this phase. In this phase, Brent crude oil prices declined by nearly 35 percent and CPI inflation touched a low of 2.11 percent in Dec’18. The trend reversed for most part of 2019 with rupee depreciating by nearly 3.2 percent from Jan’19-Aug’19. However, rupee appreciated by nearly 1.65 percent from Sep’19-Jan’20 on the back of recovery in global risk appetite.

On account of CPI inflation remaining under RBI’s target of +/- 4 percent, RBI decided to cut interest rates four times by 25 bps in 2019 and one more time by 35 bps. The current repo rate stands at 5.15 percent. However, retail inflation in India touched 7.35 percent in Dec’19 on account of sharp increase in domestic food inflation coupled with crude oil increasing by nearly 10 percent in the last quarter of CY19.

Current Q3 GDP from India came in at 4.5 percent lower by 0.5 percent from Q2 GDP data of 5 percent.

According to Indian Government data, India is likely to grow at 5 percent for FY20, a place much slower than FY19. However, according to OECD, India’s growth is expected to gradually recover to 6.5 percent in FY21 on the back of private investments in India and reduction in borrowing cost of corporate sector too boost the economy going forward.

On the trade talk’s front, US and China signed the Phase-1 of the trade deal on 15th Jan-20 and both parties were keen to start working on phase-2 of the trade deal. Under the current agreement of the phase 1 of the deal, China has promised to buy an additional $12.5 billion in US agricultural products in year one, and then $19.5 billion in year two.

US FED had increased interest rates by four times in 2018. In 2019 FOMC meeting it was highly unlikely for US FED to increase interest rates, similar to 2018. In 2019, US FED decided to cut rates three times by 25 bps in order to boost business sentiment in the economy. However, according to the FED dot plot released by the FOMC in its latest monetary policy meeting the central bank is seeing target rate at 1.6 percent in 2020 which means that it is highly unlikely for any kind of movement in interest rates for the next year.

In 2019 inflation has remained subdued and below US FED’s target of 2 percent and US has added on an average of 170,000 jobs per month between Jan’19-Dec’19 which is lower than 2018’s average (180,000).

With phase-1 of the deal already signed and phase-2 talks to commence in the near future coupled with continuous inflows in the Indian capital markets will possibly lead to appreciation of Indian rupee.

The inflow of capital by the FII’s into the equity market stood at Rs.101122 crore for the period of Jan to Dec’19. Similarly there was an inflow of Rs. 25882 crore in the Indian debt market during the same time period.

With inflows into the Indian capital markets and positive sentiments around the US China trade talks that next stage of the trade talks would commence soon. All the factors listed above would possibly add further strength to the Indian rupee.

However, if the slump in domestic growth continues then this can act as a major risk to the view.

Hence, the likely trend of rupee is to move lower (CMP: 71.12) towards the 70 mark by the end of Feb’20.