Religare Securities Sees Rupee Heading Towards 70/$
Stronger dollar, FCNR deposit redemptions pushing rupee towards record lows
The Indian rupee hit its all-time low of 68.8550 against the U.S. dollar. The weakness in the Indian currency is in line with the movement across emerging market currencies which have weakened in response to a stronger U.S. dollar index and the resultant unwinding of carry trades. Redemption of foreign currency non-resident (FCNR) deposits raised in 2013 is adding to the pressure on the rupee.
BloombergQuint spoke to Sugandha Sachdeva, assistant vice president and head of metals, energy and currency research at Religare Securities Ltd. who noted that the trend for the rupee remains bearish and added that the currency may weaken towards 70 against the dollar. The weakness in the rupee may also prevent the Reserve Bank of India from cutting rates further in the near term, she added. The differential between U.S. government bond yields and Indian government bond yields has fallen, leading to $1.8 billion in outflows from the Indian bond markets. A rate cut, which may lead to a further drop in bond yields, could lead to quicker outflows.
Below are the edited excerpts of the conversation:
The Indian Rupee is close to its all-time low of 68.8450. What is causing this weakness and how do you expect the rupee to move from here?
As of now what’s triggering the fall in Indian rupee is the fact that there are huge FCNR deposit outflows. Around $26 billion in outflows are expected (between September-November), of which about $7 billion is expected between November 9-30. So that’s triggering the fall in Indian rupee.
Additionally, the dollar index has been rallying (which has risen almost to a 14-year high), so that’s another factor leading to the fall in the Indian rupee. We have also seen a significant sell-off in Indian equities. As of now we are very close to the all-time lows for the rupee and that should act as a support area.
However, considering the current factors, in case that’s also breached, we are likely to head towards 69.80/$ in the near future.
Can the rupee fall worsen as we head closer to the December Fed hike which the market believes is imminent now?
Yes, another factor fueling the rupee fall is that the rate hike bets have increased significantly and it is almost certain that the Fed will increase interest rates in the December meeting. The comments from Janet Yellen recently and also the minutes of the Fed’s November meeting have indicated that there is a strong case for a rate hike in the month of December.
Markets are also pricing in an expectation that pace of rate hikes may increase next year under the new President Trump as he is likely to boost inflation through his infrastructure spending plans. That could lead to further lows for the Indian rupee. So, in all, we could see some support near all-time lows but then the outlook looks bearish and we are headed closer towards the 70 mark.
Do you expect the RBI to intervene in the forex market? Traders believe the RBI could have sold dollars today as the rupee approached a record low.
Even I believe that the RBI would step in and intervene but as of now the importers demand is very strong and the outflows are the only reason leading to the fall in the Indian rupee. RBI would intervene to some extent which would allow some retreat from current levels. But that would not aid the Indian rupee to a very significant extent. We may see levels of around 68.50 for a very brief time but the trend remains weak and the trajectory is weak in the coming days.
Will a weakening rupee be a deterrent for the RBI to cut the repo rate?
Yes, that can be a major factor. With the rupee close to all-time lows, that should deter RBI from further rate cuts, at least in the immediate future.