The Roving Scout | INR: I NEED (Not) REST

The Roving Scout | INR: I NEED (Not) REST

                                        INR: I Need (not) Rest

“A Disordered Currency is One of the Greatest Political Evils” – By Daniel Webster

Indian Rupee (INR) has never ever depreciated so much in the history of modern India. On YTD basis, INR has depreciated by ~12%. Though the uptick in USD-INR rate has been undesirable, INR has simply reacted more and its depreciation has been in line with weakness in the wider Emerging Market basket. Among Asian markets too INR is worst performer. We in this short note try to answer both fundamental and political reasons behind weakness in currency and short term technical outlook for INR. Performance of INR against other currencies

Fundamental Reasons:

  1. US Fed Rate Hike: Weakening of Emerging Market (EM) currencies during US federal rate hike is not surprising. EM currencies tend to react negatively due to unwinding of carry-trades and sharp outflow of hot money causes weakening of EM currencies. The ongoing trade war between US and China; sanctions on Russia; Iran and Turkey and economic crisis in Argentina has also sharply dented the sentiments globally. Rising interest rates continue to provide safe haven status to US attracting more dollar inflow.
  1. Spike in Crude Oil Prices: Crude oil prices touched low of $26.05/barrel in Feb 2016. Today Crude oil prices have more than doubled due to numerous reasons and have ballooned the India’s Current Account Deficit (CAD). Among stable economies, the ones having CAD have seen sharper weakening of currencies. When Oil prices were lower, India witnessed positive trade shocks and Rupee has appreciated (in 2007) against US dollar. However, the relative appreciation of the Rupee is damaging for our exports as same can be replaced by other emerging markets. The fact that Rupee is depreciating is actually positive for our exports and domestic growth. Exports contribute 20% of India’s GDP and is major employment generator. This phenomenon wherein one sector of the economy benefits at the expense of the other is called as the ‘Dutch Disease’. 
  1. Rise in US Dollar Demand by Importers: The recent spike in Rupee caused some panic among importers and corporates with unhedged foreign currency borrowing. Many importers were compelled to close their position and book loss once Rupee crossed 70 level. This led to massive rise in dollar demand resulting in further weakening of Rupee. Moreover, defence related payments also took place during this time of the year.
  1. Lack of RBI Intervention: In our opinion, lack of intervention by Reserve Bank of India has encouraged speculative trades against Rupee. Though recently RBI has intervened in order to protect Indian Rupee from sliding further, Indian govt. has also taken few steps last week to ease the pressure like increase in Foreign Portfolio Investor (FPI) limit; relaxing norms for raising overseas borrowing; restricting non-essential imports and aggressively promoting exports.All these steps will just improve market sentiments and are not enough to arrest decline in Rupee. While, increase in FPI limit is welcome step but we have to keep close watch on FPI inflow into debt market as US Fed is increasing its interest rates India may not be too attractive market in current scenario. Also relaxing overseas borrowing norms has its own downside in form of future repayments and hence not prudent in long term.

A political view, is always that Rupee depreciates during election year and both seem to have strong correlation. To conduct elections, country needs money and it’s no brainer to understand that weaker Rupee helps to get more money into the country. So we did some back-dated analysis to find out whether this assumption holds true or not.

Comparison of INR change before and during an election year in India

And we found striking results and couldn’t disagree to the fact that Rupee and Election year has direct relation. Except 2004, Rupee has always depreciated during election years. In 2004, BJP govt. headed by Honourable Prime Minister of India Mr. Atal Bihari Vajpayee was expected to win the elections under its India Shining campaign. Also during his regime, India recorded Current Account Surplus I.e. Value of Exports were greater than Imports. Hence the expectation of stable govt. and improving India’s economic condition ensured positive sentiments in the market. Thus Rupee appreciated in 2004.

But BJP lost the 2004 election and congress came to power and formed a coalition govt. Since then Rupee has depreciated mainly due to record high crude oil prices and allegation of corrupt govt. led to negative sentiments in the market. Congress lost 2014 elections and Rupee crossed $60 mark. With India on the cusp of heading into 2019 election year Rupee has already started depreciating again and has touched $72.98 mark as we write this note. Will Rupee appreciate or depreciate from these levels depend on several triggers on both International and domestic front.

  • Ongoing trade war between US and China
  • US Fed rate hike policy meeting on 25th & 26th18
  • US mid-term elections in Nov.18
  • Elevated Crude Oil prices – Brent to hover around $80/bbl.
  • Further Sanctions by US on Turkey, Russian and Iran and
  • Reserve Bank of India Monetary Policy in Oct.18

Going Forward…

We believe fundamentally there is still some steam left in the Rupee to weaken further from current levels. India’s GST revenue are below expectations. The govt. has already reached 86% of budgeted fiscal deficit target in Jul.18 itself. Continued forex intervention by RBI, rising demand for US Dollars from Importers and high Crude Oil prices shall continue to push Rupee upwards. With election year approaching govt. can ill afford to curb on spending. Any fiscal slippage could be detrimental and will be viewed negatively by FPIs resulting in weaker Rupee.

Technical View on INR: Assuming Crude Oil Prices continue to remain at current level (Brent $79.72/bbl) and other things being equal if INR CLOSES above 73.10 level then it can touch 74.30 level in next 1-2 months. If it doesn’t breach 73.10 level INR could appreciate till 71.5 and then 70.70 level.

Published by Swiss Singapore Overseas Enterprises PTE Ltd. The material contained herein has been obtained from sources believed to be reliable but is not necessarily complete and cannot be guaranteed. Any opinion expressed is subject to change without notice. All information is for the private use of the person to whom it is provided without any liability whatsoever on the part of Swiss Singapore Overseas Enterprises PTE Ltd. or any associated company or any employee thereof.

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