Jun 13 2018

Dissecting Rupee Weakness to 72 by March’19.

Rupee has been on a roller coaster ride. Market participants are divided between will it breach all-time lows or rupee will bounce back from current levels. We have tried to put across few important indicators below which are suggesting sustained weakness in the pair:

A. Permanent Foreign Currency Flows – Current Account deficit + FDI + FPI has turned negative in FY18 after three long years of positive flows. With fed hiking rates the trend is likely to aggravate in FY19.

B. High Crude oil prices – The CAD situation likely to worsen in case oil prices continue to rise from $75 to $85, a jump of over 15%. Though it’s unlikely to sustain given the rise of alternate energy sources mitigating rise in world energy requirements.

C. Monetary tightening – Major central banks are indicating tightening monetary policy regime. The limited capital will seek safer and high yielding currencies limiting flows to EM currencies. This will further aggravate permanent FX flows issues for EM’s.

D. Is inflation going to peak? Yes, The expectation on inflation going up further is doubtful which will subside hawkish tone of Fed in subsequent meetings.

E. Limitations to borrow in FC on current account transactions – largely imports financing has come to a standstill post ban on issue of LOU’s. With tepid export growth the BoP position is likely to get aggravated in medium to long term.

F. Political uncertainty – Though at a distance, alarm bells will start ringing when we are closer to last quarter of CY18. Modi is largely popular but united opposition may put a dent of 50-75 seats in 2019 Lok Sabha polls. In case this comes true and Modi has to depend on allies for support, foreign investments will range from negative to static.

G. FCANR (B) Swap Window – RBI May contemplate introduction of swap window for NRI deposits to wither sudden depreciation in home currency. This will bridge the gap created on account of current account deficit and help stabilise rupee. The window is likely to get opened in Q4 FY19 to take care of large outflows.

What levels? and when?

September’18 – 66.25 to 69.50

December’18 – 68.00 to 70.50

March’19 – 68.00 to 72.00