Can the rupee breach 70 level against the US dollar?

Rupee hit a record low of 68.87 against the US dollar (USD) on Thursday, surpassing its earlier all-time intra-day low of 68.85 hit on August 28, 2013

Rupee hit a record low of 68.87 against the US dollar (USD) in intra-day deals on Thursday, surpassing its earlier all-time intra-day low of 68.85 hit on August 28, 2013. It, however, edned the day at 39-month lows of 68.75 against the US dollar. The rupees’ near 3% decline in November compares with a 5.6% loss for Malaysia’s ringgit, the worst in Asia, and a 3.2% drop in Indonesia’s rupiah, data show.

Government’s efforts to cleanse the economy of black money via the demonetisation route, surprise outcome of the US Presidential elections and the possibility of a hike in key rates by the US Federal Reserve (US Fed) in its December meeting that triggered has led to outflows from emerging markets, including India, are the key reasons for rupee’s weakness against the US dollar.

 

As per National Securities Depository Ltd (NSDL) data, since November 9, FIIs and FPIs have been net sellers at $ 1.5 billion (Rs 10,214 crore) till November 18. FIIs sold an additional shares worth of Rs 1,311 crore on Monday, taking their total net outflow of Rs 11,525 crore (nearly $1.7 billion).

So where is the rupee headed? Can it touch 70 levels against the greenback going ahead?

Analysts say the excess liquidity in the banking system given the government's demonetisation move and the shortage of US Dollar due to FCNR redemption would continue to keep the Indian Rupee under pressure for the remaining days in November.

"Short-term premiums for November has gone into discount and short-term forwards are falling, suggesting dollar shortage in the near-term due to buy/sell swaps by banks on FCNR payments. Importers and companies having ECB and FCCB liabilities could panic if the rupee breaches 68.80 levels and heads towards 70, which seems quite possible," adds Abhishek Goenka, CEO, India Forex Advisors.

As per reports, banks have received nearly 6-lakh crore as deposits. Since November 12, the Reserve Bank of India (RBI) has been accepting bids in the reverse repo window, which has led to absorption of nearly Rs 80,000 crore on an average each day. On November 23, the banks offered nearly 1.2-lakh crore under reverse repo window which were accepted, analysts say.

 

Analysts at Edelweiss believe that the current weakness in USDINR will continue over the next few days, and the pressure is expected to ease once liquidity in the system normalises and FNCR redemption pressure eases. 

“We expect both these conditions to subsidy by the end of November. This appears to be a short-term trend of Rupee weakness and long-term dynamics dictates a stable Rupee due to falling inflation, contracting interest rate and inflation differentials with major trading partners,” said Sahil Kapoor, chief market strategist at Edelweiss in a co-authored report with Abhishek Chauhan.

“If USDINR were to move above the pressure lifetime high of 68.85 the Indian rupee is expected to weaken past 69. However, we believe that the Rupee weakness will largely be contained below the levels of 69.50 to 70 for the next few weeks before the markets normalise,” he adds.

G. Chokkalingam, founder & managing director of Equinomics Research & Advisory, on the other hand, believes that the rupee can cross 69 levels against the USD in the short-run and should reverse course within a month.

“I don’t think it will breach the 70 mark. Right now, the rupee supply is limited given the demonetisation move. Given the cash crunch, the demand for rupee should go up and the rupee will reverse course going ahead. The current situation has been created due to exit of FIIs in the equity and the debt segments,” he adds.