No runaway decline in rupee's value, may recover by March: Experts

The rupee will remain under pressure for now but currency market experts and economists do not expect a runaway depreciation.

Pressure on the rupee may ease a bit by March, as the markets get used to tapering by the US Federal Reserve and the Reserve Bank of India (RBI) dips into its massive reserves to iron out any volatility. This may even end up benefitting the rupee, according to a Business Standard poll of 12 experts.

The rupee closed at 75.78 to a dollar on Friday, an 18-month low. The poll participants do not see a runaway depreciation in the rupee but it can be expected around 76.50 to a dollar by March-end. Some expect the domestic currency to strengthen to the 74.5 level by that time, while others see the rupee touching 77 by March and even 78 by June. 

The rupee has recently come under pressure for several reasons. 

One key reason is the year-end thinning of interbank trades. Many foreign banks cut their positions by the end of the year and come back only by the middle of January. Thin trades push up volatility in the currency markets as a result.

There are fundamental reasons, as well. 

According to Gaurav Kapur, chief economist of IndusInd Bank, a widening merchandise trade deficit, volatile portfolio flows on rising global inflation and stretched valuations, strengthening dollar bias, and pandemic resurgence concerns should continue to weigh on the rupee in the near-term and over the last quarter of the financial year. 

This may lead to the rupee weakening further to around 76.20-76.30 vs a dollar, especially when the US Fed is likely to signal hastened monetary stimulus withdrawal. 

“If the Life Insurance Corporation of India (LIC) initial public offering goes through, we can see net positive portfolio flows in the fourth quarter, and this should strengthen the rupee around 75.25-75.50 level in March 2022; the key downside factor remains negative surprise of domestic inflation or a sharp yuan depreciation,” said Kapur.

Ashhish Vaidya, head of treasury at DBS Bank, said the rupee can be expected to trade in the range of 74.50- 76.5 in the near term but by March, it should veer closer to “74.5-75 levels as the new year fresh allocations come in, along with the probability of index inclusion and some dollar weakness.”

According to Rahul Singh, senior fund manager at LIC Mutual Fund, the rupee should be range-bound between 74 and 76 until March. "Even though there are negatives like increase in quantum of tapering and likelihood of oil again going up to 85-90, the RBI will draw a lot of comfort from their huge currency reserves. Further, there can be announcements with respect to inclusion in the global bond index in the Budget, so the government and the RBI may not want the rupee to move drastically," Singh said.

Prasanna Balachander, group executive and head of global markets at ICICI Bank, said: "The deteriorating external trade balance and continued FPI outflow from equities have shifted the balance in favour of weakening of the rupee.” 

"This further gets magnified in an environment of general dollar strength amid divergent growth and monetary policy landscape. Given this, we expect the rupee to remain under pressure in the near term and weaken towards 76.50 against the dollar by March-end," Prasanna said.

According to Satyajit Kanjilal, managing director of Forexserve, in the medium term, say March, oil prices would likely fall as supplies from Iran would open up by then, and the Opec would ramp up production. 

“Globally, the dollar is likely to be stable due to rate hikes, and such speculations have already resulted in a big move in the dollar. The RBI may not also allow a big fall in the rupee to distort the real effective exchange rate (REER) equation to a disadvantage,” said Kanjilal. He expects the rupee to be at 75.90-76.50 by March. 

REER measures the rupee’s strength against its trade partners. The rupee increased its overvaluation on an REER basis “by 9.4-9.9 per cent in November 2021, the strongest level in nearly 4 years,” economic research firm QuantEco wrote in a report.

“We continue to hold on to our long-held call of USD/INR at 76 by March 22. We expect the US Fed’s headstart concerning policy normalisation to continue to play an assertive role for the dollar in 2022, with the likelihood of an acceleration in the pace of ongoing tapering exercise earlier in the year opening up space for two-three rate hikes later in the year,” said Vivek Kumar, an economist at QuantEco. 

“Continuation of extremely accommodative monetary policy stance by the RBI in the short term is unlikely to cause runaway pressure on the rupee as the growth-inflation balance is improving after the pandemic shock, while close to record high FX Reserves act as a moat for the currency," Kumar said.

“We do not expect runaway depreciation of the rupee," said Abhishek Goenka, managing director of IFA Global. 

“The RBI is one of the most dovish emerging market central banks. A dovish RBI and a hawkish Fed have narrowed the interest rate differential between India and the US which has translated into lower forward points in USD/INR. Lower forwards make it less expensive to short the rupee against the dollar," Goenka said. IFA expects the rupee to trade in the near term at 74.50-76.30, while by March, around 76.

There are also rupee bears in the mix. “The rupee is expected to be under pressure on expectations of a rate hike by the Fed. It should trade between 75 and 77 until March. Further rising current account deficit will also impact depreciation of the currency,” said Debendra Dash, head of treasury at AU SFB.

“We expect the rupee to be at 76.50 by March on the growing trade deficit and continued selling from FIIs. But it is not a concern as it is helpful in export competitiveness, and the gradual weakening of the rupee should continue,” said Gopal Tripathi, head of treasury at Jana SFB.

Ritesh Bhansali, vice president at Mecklai Financials, expects the domestic currency to be at 76.50 in the near term, while settling at 75.5 a dollar level in March. Amit Pabari, managing director at CR Forex, sees the rupee reaching 76.50-77 vs a dollar, unless the RBI intervenes actively.

At the extreme, Samir Lodha, managing director of QuantArt, forecasts it to touch 78 by June.