Rupee seen a winner in US-China trade thaw, but gains may be slow

Upcoming Lok Sabha polls, rising oil prices, RBI's efforts on stable exchange rate may drag down upward swing

With the United States and China sounding a reconciliatory track on trade talks, currencies of emerging markets, including the rupee, are poised to gain strength. However, the imp­ending general elections, rising oil prices and the Reserve Bank of India’s (RBI’s) efforts to maintain a stable exchange rate regime, may drag down the possible upward swing.  

US President Donald Trump delayed the deadline for imposing tariffs on Chinese products worth $200 billion, citing “substantial progress” during trade talks between the two nations. The Chinese stock jumped and yuan strengthened as a result. 

The yuan strengthened to 6.68 a dollar, from 6.79 on February 11. 

“Finding a common ground on US-China trade talks lifts the risk-off sentiment from emerging markets. Yuan’s strengthening also puts pressure on rupee to strengthen,” said Satyajit Kanjilal, managing director and CEO of Forexserve. 

However, Kanjilal noted that rupee’s gain would be limited to 2-3 per cent from the current level of abo­ut 71 a dollar because of the upcoming elections. Also, a strong rupee doesn’t really help India in the medium run. 

“This government’s intention seems to be to present a stable exchange rate regime, rather than a strong rupee, to aid businesses and preserve competitiveness. Any inflow that comes now should be used to build up reserves,” said Kanjilal. 

India’s foreign exchange reserves are slowly inching towards $400 billion, but are still lower by more than $26 billion from its peak of $426.08 billion in mid-April last year. 

Indeed, currency dealers say the RBI is intervening to keep the rupee around the present level. The central bank is buying dollars when the rupee is strengthening, the strategy it pursued on Monday, and also selling dollars to help the local currency regain its balance when there is an outflow of foreign portfolio funds. 

“We don’t see the rupee appreciating a lot from here. It would rather be in a range of 70.50 to 72 a dollar as the RBI is seen acting both ways,” said Abhishek Goenka, managing director and CEO of IFA Global.  

Apart from the Lok Sabha elections, oil prices have started firming again and that is a dampener for the rupee’s appreciation, Goenka said, even as Pakistan-related tensions have largely been discounted by the market so far. 

Another important point that currency dealers are watching is that the positive outcome of the US-China trade talk could be more visible in other currencies in the region, rather than the rupee. “A lot of foreign investments are going to Indonesia and boosting the rupiyah. The rupee may not outperform other emerging currencies till the elections are over,” said Ritesh Bhansali, currency dealer with Mecklai Financials. 

The rupee may have had a fair chance of strengthening, but the recent firming up of oil prices is working as a dampener, Bhansali said. 

Brent crude futures rose to $67.26 a barrel, up 0.2 per cent from its previous close on US-China trade talks. Nevertheless, China and other emerging markets could be leading the global growth and India should benefit from it. 

According to Morgan Stanley, global growth will start improving in the first quarter. “Fed tightening, rising trade tensions and a growth slowdown in China were the key drivers behind the recent mini-cycle. However, they are reversing and moving in the right direction,” Morgan Stanley said. 

The rupee has largely underperformed other emerging markets currencies, but have slowly started to recover. 

In the December quarter, the rupee depreciated when other emerging markets gain. Since September 28, the rupee has gained 2.1 per cent, whereas Turkish Lira has gained 14 per cent and the rupee’s closest peer, Indonesian rupiyah, has gained 6.3 per cent. However, South Korean won has lost 1 per cent in the same period.