(Mint)
(Mint)

This year could be a sit-it-out one for the rupee

  • From being one of the best just a month ago, the rupee is now one of the worst performers among emerging market currencies
  • Given that key variables such as domestic growth, oil prices, global sentiment, elections are still evolving, this could be a year of sitting tight for the rupee

Fundamental economic performance of countries underpins their exchange rates, but currency markets tend to swing more with the prevailing sentiment, friendly or otherwise.

Considering that hopes have risen of a truce between the US and China over trade, and the US Federal Reserve is softer than before, emerging market currencies have been back in favour this year.

But these effects haven’t brushed up against the Indian currency even as most of its peers have made big gains riding recently on the emerging market rally.

From being one of the best just a month ago, the rupee is now one of the worst performers among emerging market currencies. The exchange rate has weakened 2% so far in 2019 and much of the depreciation has been during the last one month.

(Mint)

The answer to why the Indian currency looks ugly is not the coming elections as one would like to believe. Though election-induced volatility is real, it doesn’t hold much water in the long run as past election years have seen the currency appreciate in the run-up to the poll results, according to HDFC Bank research. “While elections-related uncertainty do affect Indian markets, it’s tough to draw a definite causality," the top private sector lender said in a note.

Ergo, the reasons are the good old trio of oil, growth and returns. Considering oil’s climb of nearly 26% so far this year, the trade balance for India is not looking pretty, especially as the trade deficit has grown 9% year-on-year for the first 10 months of FY19. Foreign investors haven’t warmed up to Indian bonds even today and are worried that equities are overpriced.

Most of these variables are difficult to predict and hence, there seems to be no consensus among analysts as to which way the currency will go. The median of the forecasts of the top-30 respondents for the rupee shows that the currency would hardly budge from its current levels this year. The median forecast is 70.66 to a dollar, a mere 0.6% gain for the currency.

Abheek Barua, chief economist at HDFC Bank, puts a base-case scenario of a marginal appreciation in the rupee, drawing strength from improving domestic growth. “India is expected to buck the trend. GDP growth is likely to be robust, at around 7.3-7.5% despite a slowdown in global growth," he said.

Given that key variables such as domestic growth, oil prices, global sentiment and elections are still evolving, this could be a year of sitting tight for the rupee.

Close