Rupee appreciation likely to be a short-term event: BS Poll

The Indian rupee continued to strengthen on Tuesday, rising to Rs 63.64 against the dollar, against Monday’s closing of Rs 63.81. However, most respondents in a Business Standard Poll, which included economists, bankers and forex dealers, believe this drop is temporary and may last till the third quarter (September-December), or Q3, of FY18. The currency is expected to depreciate to over Rs 64 by March, said two-thirds of the respondents. 

In a poll of 14 respondents, eight respondents said the rupee is likely to appreciate in the short-term to Rs 62-63.5, as there is uncertainty about the US Federal Reserve’s rate increase decision and unwinding of its $4.2-trillion bond portfolio. “The dollar is oversold and the overall news flow from the US hasn’t been positive. This has led to an appreciation of the rupee,” said Abheek Barua, chief economist, HDFC Bank. 

This uncertainty has been reflected in the Dollar Index, which measures the greenback’s strength against major global currencies. From its January level of 102, the Dollar Index is currently at 93, a steep fall in the dollar’s value, which has led to a rise in the rupee and other emerging market currencies. 

Barua believes the rupee may move sideways or depreciate a little in the short-term, and then start appreciating again. “If the rupee falls below 63 in the current rally, I expect the Reserve Bank of India (RBI) to intervene,” he added. 

The rupee has been appreciating steadily against the dollar, after hitting a low of Rs 68.78 on November 28. This calendar year, the rupee has appreciated by 6.7 per cent against the dollar — the first time after six years of depreciation. This is also the highest appreciation of the Indian currency, against the dollar since 2007, when it rose 12.3 per cent that year due to high inflows into the Indian stock market. The following year in 2008, when the global credit crisis hit the Indian markets, the rupee fell 19.2 per cent.  

The current rally in the rupee is likely to fizzle after Q3 of FY18. Nine of the 14 respondents believe the rupee will depreciate after that. Madan Sabnavis, chief  economist, CARE Ratings, believes the rupee is likely to hover around Rs 63-64 till September-end and then, factors like a wider trade deficit, lower software receipts and saturation of foreign portfolio investors’ limit in debt would lead to depreciation of the currency again to around Rs 65 by March. “Our target estimate for the rupee was Rs 66/dollar by March. However, this sudden drop has led to a revision of our estimate,” said Sabnavis. 

“Considering the strong interest in the Indian market and the interest rate differential, flows will continue to come to India, and should keep the rupee strong. But by March, it should give up some gain,” said Soumya Kanti Ghosh, group chief economist, State Bank of India. 

According to a recent DBS report, what is helping the rise in the rupee is also the absence of the ‘talking down’ of the currency to contain gains by government officials — a common feature in the part. “Gains are being perceived as a sign of strength rather than a challenge to competitiveness. Chief Economic Advisor Arvind Subramanian has been in a minority, highlighting the risks of strength,” said the report. According to it, the RBI appears more tolerant of currency strength. Intervention efforts have been focused on minimising volatility rather than protecting a certain level.

Currency dealers said that the recent fall is creating a new floor for the rupee. This was apparent in the market behaviour of importers when the rupee fell to Rs 63.55 last week. A massive buying interest was seen, as importers rushed in to buy dollars. Currency dealers said hedging activities spiked at around this level. A V Rajwade, a senior consultant and commentator on currencies, strikes a worrisome note. He feels a strong domestic currency not only erodes the country’s competitiveness, but relying on foreign investments to bridge deficit figures and building reserves are also harming the quality of the reserves itself, while piling up liabilities. “We don’t know when the Minsky moment will come, but no other country in the emerging economy is in the kind of continued dependency on foreign funds as we are,” Rajwade said.