Fears of a recession in the US are back to haunt investors. Equities and commodity markets have fallen in the past two trading sessions. Not only stocks, but also emerging market currencies would feel the heat in a scenario of prolonged concerns about a recession. The rupee, which has just seen a change in fortunes, will not be spared either.
There are also concerns that the recent rally in the rupee may not sustain even if fears of a recession in the US don’t come true. The appreciation in the local currency has been driven by higher foreign fund flows, but nothing material has changed on the ground in terms of fundamentals. Concerns such as trade wars and Brexit also remain.
For now, currency traders have put these worries on the backburner. This rupee has strengthened from lows of about 71.81/$ in mid-February to 68.94/$ at present.
Rising expectations of a stable government have helped reverse sentiment and the US Federal Reserve’s recent dovish monetary policy stance also lent a hand. Consequently, foreign investors’ interest in Indian equities revived, aiding the rupee’s relief rally. In the last one month, foreign institutional investors (FIIs) have parked $6.02 billion in Indian equities. An analysis by ICICIdirect shows the rupee appreciates meaningfully when foreign fund flows are high (see chart).
An economic slowdown doesn’t bode well for any risky asset class and these FII inflows will peter out if concerns about a recession in the US do not recede.
“There isn’t much room below 68.50/USD for the rupee to appreciate. China has been on a weak footing as far as growth is concerned. Even on the trade war front, things haven’t been sorted out completely. So these will likely remain the risks for the Indian rupee. We see the rupee ending 2019 at 73/USD. Being a high-yield currency, it would have natural depreciation pressures," said Sajal Gupta, head (forex and rates) at Edelweiss Securities Ltd.
The signs of a recession in the US were already there and were the very reason for the Fed’s dovish stance, said Amit Gupta, analyst at ICICIdirect. “The first leg of these recession fears has been positive for the Indian rupee because we are seeing more foreign flows. We may see the RBI cut rates in the upcoming monetary policy in April, so FIIs flows will come in debt market as well. But RBI may not let the rupee’s appreciation continue beyond a point and we may see some intervention to aid export competitiveness," he said.
The rupee has been supported by optimism that the US and China will reach a trade deal, and the impact of Brexit may not be as bad as feared. However, as DBS Bank Ltd said in a note on 20 March, “Unfortunately, none of these factors are firm… Our target remains for USD/INR to end the year above 70."