The rupee continues to struggle and has depreciated almost 1.5 per cent in December, despite a better-than-expected winter session. The United Progressive Alliance (UPA) government managed to win Parliament’s consent for foreign direct investment (FDI) in multi-brand retail, and the banking laws Bill got the approval of both Houses. The huge dollar demand from companies to pay their dollar liabilities was one major reason which added to the rupee weakness.
Little stability could be seen at the start of 2013 but the overall weakness in the rupee remains intact. Inflation is still above the comfort level of the Reserve Bank of India (RBI), and the central bank reversing its monetary policy could impact it further. At the same time, our trade deficit still remains high at $173 billion (till November).
According to RBI data, 42 per cent of the total external debt of $345 billion was due till March 2013. The amount comes to around $144 billion, including short-term external debt of less than one-year maturity and repayments of long-term external debt falling due within one year. This could lead to continuous pressure on the local pair.
Looking at the global scenario, the Euro zone is seen stable, with the US fiscal cliff taking the limelight, with no clear solution at the moment.
The moderate slide in global markets tells us that investors are nervous but hopeful that politicians will find a way out of this mess. Unfortunately, according to us, the markets might have to wait until mid- to late-January before a deal is done because some Republicans are up for election in January and they will oppose anything that poses a challenge to securing their seats.
The general elections in Japan brought the Liberal Democratic Party (LDP) back to power, and the market speculates that this government could lower interest rates on reserves to zero or negative, which would further lead to shift of the carry trade from the dollar to the yen, unwinding of the US dollar carry trade and pushing the dollar index higher again towards 85-90 levels. Signs of the same were visible in the past few trading sessions when the yen moved from 80-84.
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Hence, looking at the local weakness on account of economic uncertainty and the risk aversion scenario globally with improvement in the overall US economic data, we feel the dollar index could once again move towards 85 level, pushing the rupee to new lows, that is towards 57.50-58 by mid-2013.
The writer is founder & CEO, India Forex Advisors Pvt Ltd