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Triggered by mixed signals by the Reserve Bank of India (RBI) while reviewing the Monetary Policy on Tuesday sent the rupee past the 60-per-dollar mark for the first time the central bank announced liquidity tightening measures on July 15.
The slide show continued Wednesday with the INR hitting 61.2/dollar before settling at 60.37 for the day.
“By sending confusing signals, while reviewing the Monetary Policy on Tuesday, on whether it is trying to defend the currency (tighter policy) or wanting to support growth, there is a growing risk that the INR will depreciate and the RBI will need to enact further measures to tighten liquidity, potentially having to hike the repo rate (we assign a 20% probability),” said Sonal Varma, economist, Nomura.
Outlook
In this backdrop and amid negative global cues, the CNX Nifty slipped nearly 60 points to sub-5,700 levels and the S&P BSE Sensex was lost 182 points to touch 19,169 in opening moves. However, the markets recovered by close to end flat.
So, where is the rupee headed and is there more pain in store for investors? More importantly, where should you invest in such a scenario?
Says Abheek Barua, chief economist, HDFC Bank: “I think there is a lot of anxiety right now and one should wait and watch what the US Federal Reserve does in its policy today. I think rupee’s trajectory will also depend on the outcome. If the policy assures us that quantitative easing (QE) will be withdrawn somewhat more slowly than anticipated, then there could be some appreciation and a move back to 59 – 59.5 levels. However, if there is anything adverse, the rupee could go up to 62 – 62.5 against the US dollar.”
“Over the next 30 – 45 days, one can expect an appreciation of 4 – 5% that should take the rupee closer to 59 levels. Any level above 61 is suicidal for the economy. I think more reform measures are on the anvil which could again make the rupee stronger,” said Abhishek Goenka, Founder & CEO, India Forex Advisors.
“The markets are factoring in too much pessimism as regards the tapering off of the quantitative easing programme by the US Federal Reserve. Post the FOMC statements, I think the INR will show some signs of stability,” he adds.
According to Varma of Nomura, while the RBI has guided that these measures are temporary, there is no guarantee that depreciation pressures will end within that timeframe. “Concerns over Fed QE tapering and slowing EM growth mean investors remain cautious on EMs, hence external financing difficulties may continue for much longer,” she says.
Santosh Kamath, CIO - Fixed Income, Franklin Templeton Investments expects the short-term rates to remain firm until there is a change in liquidity stance and a lot depends on developments on the rupee, CAD and global liquidity fronts.
“Institutional Investors are likely to gradually position their portfolios towards an eventual monetary easing cycle to address growth concerns. Investors with a short-to-medium term horizon can consider funds focused on corporate bonds and those with a medium to long term horizon can consider funds with exposure to long dated bonds/gilts,” he suggests.
