Rupee volatility to benefit NRIs

The median estimate in a Bloomberg survey puts the rupee at 68 per dollar by the end of 2016.

A medium-term bearish outlook for the Indian rupee is still on the cards although last week's speculations of an imminent devaluation of the currency had subsided following a rebuttal by government officials on such a move, analysts said.

The Indian currency, which has seen its value eroding 65 times against the dollar since 1947, will continue to face global challenges as an impending increase in US interest rates, weak global demand and the Reserve Bank of India's dollar purchase drive to build foreign-exchange reserves threaten to weaken the currency toward the end of the year, currency experts said.

"Rupee is facing global challenges on the upcoming US Fed interest rate decision on September 21, 22 and related global sell-off happening in stocks, currencies, commodities and bonds. The impact of all those is also affecting Indian markets and rupee negatively," said Sajith Kumar P.K., CEO and managing director, IBMC Financial Professionals.

Next month's $25 billion FCNR deposit maturity and rupee outflow are also a concern for the rupee even though former RBI Governor Raghuram Rajan had highlighted that there won't be any issue for the currency, Kumar said.

On the other hand, improved Indian economic data performance like retail inflation decelerating to 5.05 in August and foreign institutional investment inflow to the stock market and oil price decrease are supporting the argument that the rupee will overcome its challenges, he said.

Last Thursday, the rupee saw a sudden plunge of 13 paise in the morning on reports of currency devaluation, but recovered to close at 67.02 when finance ministry officials said there were no plans to devalue the domestic unit and its value will continue to be determined by the market.
It opened firm at 66.87 on Friday and gained steadily throughout the day. The median estimate in a Bloomberg survey puts the rupee at 68 per dollar by the end of 2016. While that signals a decline of 1.6 per cent from Monday, it is far less pessimistic than a prediction of 68.5 on August 31.

The rupee gained 0.1 per cent on Monday to 66.94 per dollar, but remains down 1.2 per cent this year in Asia's worst performance after the Philippine peso and Chinese yuan. HSBC Holdings has predicted it will end 2016 at 66 per dollar, stronger than its earlier estimate of 69. Barclays raised its forecast to 68.50 from 73.50, Standard Chartered changed its to 66.25 from 68, while Macquarie Bank has revised its prediction to 68 from 70.

Adeeb Ahamed, CEO of Lulu International Exchange, said the Fed meeting which is going to be held in the next couple of days is very crucial and the Fed decision would certainly give direction to the major stock markets and currencies across the globe.

"The Indian rupee has been moving in a very narrow range for quite some time and the rates are good and consistent. We feel that the expats who are looking to remit back home can make use of movement of the rupee above 67-mark against dollar," said Ahamed.

According to HSBC strategists, given the rupee's relatively low volatility, attractive yields and improving fundamentals, it appears to be one of the most attractive carry currencies on a risk-adjusted basis. "The recent passing of GST bill by parliament has ignited another round of optimism on reform."

ING Groep, which has raised its end-2016 rupee estimate to 68 per dollar from 69, said the outlook for India bodes well given the strong growth dynamics as well as the material reduction in external vulnerabilities. "Certainly, calls for 70 by year-end seemed a bit excessive."

Currency experts argue that India should not fiddle with its current mechanism and devalue the rupee. Not only will it have a devastating impact on the domestic economy, it will also not help exports in the long run.

"Today's rupee value is pretty reasonable. Devaluation will not necessarily help exports. India needs macro-stability, years of sustained growth," Rajan said in July.

India had devalued the rupee twice on a major scale in the past - in 1966 and 1991. "While devaluation proves to be good for exports, it will ignite imported inflation as prices of imported products would rise. An increase in oil prices pushes up inflation," analysts said.

Economists argue that besides the fact that a lot of the exports actually now use imported content, higher import costs of oil will also push up the cost for exporters, and won't solve their problem of price-competitiveness. Rupee devaluation will also run counter to the government's policy to maintain stability and predictability, and can hamper improvements in foreign investor sentiment towards India following recent positive reforms, including the passage of the GST bill.

Analysts, however, believe that there is still a possibility that the Commerce Ministry might continue to press for a possible rupee devaluation with India's exports falling in all but one of the past 20 months.

- issacjohn@khaleejtimes.com

• India

Issac John

issacjohn@khaleejtimes.com