Rupee may fall to 83.50 in coming days, RBI to limit intervention to preserve foreign-reserves
By Dilip Parmar
Indian rupee marked a fourth weekly decline in a row following the sharp surge in crude oil prices and foreign institutions turned net sellers after the delay of India’s bond inclusion in the JP Morgan Global Bond Index. Apart from the broad-based dollar strength, the key data releases this week suggest the Indian economy is slowing while the US is still on strong footing. The interest rate differential, rebound in commodity prices and surging deficit all could weigh on the Indian rupee in the near term.
Also read: Rupee falls to new record low, may hit 83 per dollar in coming sessions on elevated crude price, FII outflows
Currency traders are playing cat and mouse with officials abroad as foreign-reserve depletion and intervention come to the forefront. The dip-buying in the greenback against the rupee remained a popular trade last week anticipating RBI would limit intervention in order to preserve foreign-reserve balances.
The two decade highs in King Dollar and an 18% rise in its trade-weighted index in the past year have rewritten the rules of investing in the international financial markets. King Dollar has wreaked havoc with emerging market currencies and Third World sovereign bonds. The dollar’s strength on the back of US jobs data pulled most major currencies lower last week. The dollar rally means the global economy, particularly emerging and frontier markets, face tightening financial conditions. The World Bank estimates that as many as 70 countries in the EM/frontier markets will be unable to repay almost $100 billion in sovereign debt.
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Fed-hike premium continued to edge higher over the session and almost fully priced in a 75bp rate increase on Nov. 2. Stronger hikes by the Fed mean the dollar strength to continue and not only EM currency but Euro, GBP and Yen also to remain under pressure. The key question is where the Fed terminal rate would finally be. As per the CME fed-watch tool by Feb 23 the fed rate will reach 450-475 as the base case.
(Dilip Parmar, Research Analyst, HDFC Securities. Views expressed are the author’s own.)
