BackRupee worst-performing Asian currency in August after Chinese yuan
During the month rupee depreciated by 3.65% against the dollar, it’s steepest monthly decline in 6 yearsThe currency had hit its all-time low at 74.48 on 11 October 2018
PremiumMUMBAI : The rupee has underperformed all its Asian peers except China’s renminbi in August.
The rupee depreciated by 3.65% against the dollar during the month, its steepest monthly decline in six years. The renminbi slipped 3.70% against the dollar. However, it is widely believed that renminbi’s fall was mainly because of China’s reported devaluation of its currency beyond the psychological mark of 7 yuan per dollar for the first time in more than a decade amid escalating tensions with the US over trade tariffs.
On Friday, the rupee hit 71.41 per dollar. The currency had hit its all-time low at 74.48 on 11 October 2018. The rupee has depreciated by 2.29% so far this year and some analysts warn of more pain ahead. Weakness in the rupee is a reflection of the broader underperformance of high-yielding emerging markets forex, weakness in equities, and the effect of recent policy actions, according to Nomura. Broader risk aversion and India’s basic balance deficit could continue to drive weakness in the rupee, it said.
Nomura maintained a cautious stance and said that continued Chinese renminbi depreciation will continue to pressure Asian currencies, including the rupee, while growth concerns signalled by the inversion of the US yield curve would also imply weaker inflows for India.
“Foreign holdings of India equities peaked in June and has since fallen by $3.5 billion, while the Nifty index has fallen by around 11% from its June high. That said, bond holdings have risen by $3.1bn in the same period. The risk to rupee emanates from increased risk aversion that can lead to a continuation of equity outflows, which could be accompanied by bond outflows," Nomura said in a report on 26 August.
Net foreign portfolio inflows will be an important factor for rupee performance, given the average quarterly basic balance deficit of $6.6 billion over the past year, it said. Foreign institutional investors have sold Indian stocks worth $2.19 billion in August, their biggest sell-off in 10 months since October 2018, data showed.
There are also several negative external developments such as escalation of US-China trade tensions and concerns over slower global growth that have led to concerns over high bond yielding and current account deficit forex such as rupee, analysts said.
“How capital flows behave in future will be the real testament of how rupee behaves. Traditionally, in India we have a current account deficit (CAD) and, therefore, there has always been a question on the rupee unless there are more capital flows. You need more dollars than what you earn. If capital flows come in any form, FDI, FPI, or foreign currency bond issuances, the rupee will strengthen. Whenever capital flows are abundant, the rupee has a tendency to appreciate," said Ashutosh Khajuria, chief financial officer, Federal Bank.
India’s CAD, which is a major contributory factor towards currency exchange rates, widened to $57.2 billion, or 2.1% of gross domestic product, in FY19 from 1.8% a year ago amid a general slowdown in the economy. A weak rupee against the dollar makes imports costlier, negatively affecting CAD.
Jamal Mecklai, chief executive officer, Mecklai Financial Services, also believes that the preponderance of market views are for a weaker rupee. “The rupee is weak because there is more demand (for dollars) than supply. This is because of several forces, a large current account deficit, weak exports and poor sentiment. In particular, during the past few months, FPI sentiment has worsened because of the tax issues in the budget and a general increase in risk aversion globally," Mecklai said.
Others concur. The rupee has been depreciating because of a mix of domestic and international factors, said Anindya Banerjee, currency analyst at Kotak Securities. “Globally with the China and US trade war, the situation remains quite fluid and has been flip-flopping frequently. At present, it seems there is a truce and the emerging markets will be a little more in the sun as long as the truce lasts. However, the moment talks break down, Chinese yuan depreciates and that will have a knock-on effect on the rupee. So, considering all that I would say 71 looks to be the floor and the upper cap would be 72.5 and this could be the range for September," Banerjee said.
Khajuria also agrees that the rupee is likely to be in a tight range of 71.50 to 72.50 against the dollar. “We have seen a lot of reserves accumulation by RBI because of the surge in capital flow in the beginning of the financial year. However, over the last two months we have seen there has been outflow of capital, particularly on the FPI side because of various concerns. Some of these concerns have been addressed by the government. I think that 71.50 to 72.50 should be the right range for rupee for sometime now," he said.
Typically, a weak rupee positively impacts corporate earnings of net exporters such as technology and pharma companies but hurts businesses of companies that earn revenues through net imports.
However, UBS Securities India Pvt. Ltd said corporates seem less worried about the Indian rupee. “Overall, firms expect the rupee to recover to an average of 67-68 in the next 12 months. We expect the gradual depreciation bias in rupee to be sustained. Though we expect India’s external position to remain manageable (current account deficit below 2%), global risk aversion (trade war uncertainty and slowing global growth) could exacerbate the rupee weakness," UBS said in a report on 30 August.
India’s fiscal deficit in the four months through July stood at Rs5.48 trillion ($76.65 billion), or 77.8% of the budgeted target for the current fiscal year, government data showed on Friday. The government has set a fiscal deficit target of 3.4% for 2019-20.
India’s GDP expanded at lower-than-expected 5% year on year in the April-June quarter, the slowest in over six years, driven by weak investment growth and sluggish demand.
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