Mark to Market | Has the tide turned for the rupee?
HSBC sees rupee at 52 to a dollar at the end of this year, compared with an earlier estimate of 57
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The recent slew of policy announcements from the government and central banks abroad has had a positive impact not only on local equities but also on the rupee. The easing of foreign direct investment rules in sectors such as retail, aviation and broadcast points to money flowing in.
Similarly, the cut in withholding tax on foreign loans and easing of the rules for external commercial borrowings could see an increase in dollar inflows. The European Central Bank (ECB) flows had trickled down to $1 billion in July, the latest month for which data is available, compared with an average of $2.8 billion in the preceding six months.
But these are still iffy and flows, if any, will come over the long term. What these measures achieve for now is to improve sentiment. They reduce the chance of a sovereign downgrade by rating agencies and increase the appetite for Indian securities among foreign investors. The opening of the monetary faucet by the US Federal Reserve, which adds to global liquidity, is an added bonus, both for portfolio flows and loans, notwithstanding estimates of a $1.5 trillion deleveraging by euro zone financial institutions over the next 18 months.
In any case, foreign investors have bought $5.4 billion worth of Indian securities since July, which has helped the rupee recover 6.5% from its 22 June low. Foreign exchange reserves, too, have recovered to $294 billion, about 3% more than the June bottom.
Secondly, as gold imports plummet, the trade deficit is improving, albeit slightly. Gold imports have declined by $30 billion during the first five months of this fiscal year and, consequently, the trade deficit fell to $71.1 billion as compared with $76.2 billion, commerce ministry data show.
Last month, the Prime Minister’s economic advisory council forecast that the current account deficit would contract to 3.6% of gross domestic product this fiscal compared with 4.2% last year.
The only threat is that with liquidity easing oil prices may climb up and the current account deficit forecast could go haywire. But then the same liquidity will also ensure that there are enough capital inflows to finance this deficit.
The net effect is that the view on the local currency has turned and led to upgrades in rupee forecasts. HSBC, for one, said in a recent report that it expects the rupee to trade at 52 to a dollar at the end of this year, compared with an earlier estimate of 57.
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