Currency traders see no reason to panic due to coronavirus outbreak

On February 17, Rupee was at 71.29 a dollar. Since then, it has slid 1.23 per cent. Other EM currencies have fallen about 3 per cent or more
While currency traders are shunning long term views, they don’t see any reason that the rupee will get into a freefall due to the coronavirus fear.  

“There is a huge risk aversion. The momentum of the risk aversion can be captured on a day to day basis,” said Abhishek Goenka, managing director of IFA Global.

Still, the rupee is not in a bad shape. Dealers don’t see the local currency depreciating much from the present level if the epidemic doesn’t turn into a pandemic. The immediate level could be 72.50 a dollar, which can be reached even on Monday, but 73 a dollar offers good resistance level.

If there is news about the possible containment of the virus, the rupee can strengthen rather sharply. There are quite a good number of reasons for that.

Crude oil has softened considerably, and is now trading at below $50 a barrel, which is really a boon for the Indian markets. On top of it, the Reserve Bank of India (RBI) has accumulated huge foreign exchange reserves that can be used against any sharp movement in the rupee. 

 
Besides, the exchange rate in India is actually determined by import and export dynamics. Exports are small for India, and so, a cheaper import cost because of soft crude oil and commodity prices can cause the rupee to react positively.

“With imports falling, demand for the dollars has fallen anyway. One may expect the rupee to collapse, but that’s not happening because a huge amount of money is coming to the markets, which means there is supply of the dollar,” said Jamal Mecklai, head of Mecklai Financials.

Still, “a lot depends on the global equity markets. Whether the rupee will blow up or hold steady is difficult to predict,” Mecklai said. In this context, long-term bets are risky in dollar-rupee, as the RBI could be unpredictable. 

What’s certain though is that there will be volatility, and the RBI is yet to step in with massive dollar intervention, something that all the speculators fear the most. The RBI’s actions, in the past, had triggered huge margin calls, and speculators had to cut losses.

“With $50 billion mobilised in this fiscal year alone, the RBI can go against the market, which they have actually done many time. And this can cause mayhem even in these uncertain times. Nobody wants to risk that,” said a senior currency dealer.

On February 17, the rupee was at 71.29 a dollar. Since then, the slide has been 1.23 per cent. But other emerging market currencies have fallen about 3 per cent or more during the same period, led by the South Korean won.

“Several asset classes are behaving abnormally. Despite the stock market meltdown, rupee has really not moved much. Coronavirus has not moved the Chinese yuan at all. On top of it, gold and silver prices have fallen whereas one would expect them to rise in such uncertainties,” said Goenka. The rupee seems to be watching the Chinese yuan, like it has done in the past, he added.

According to Satyajit Kanjilal, CEO of Forexserve, while the rupee direction is uncertain, there are healthy flows in the market and the RBI’s forex kitty is insurance enough. “All currencies have fallen, but the rupee has not fallen that much. There will be IPO-related flows because of SBI Cards; other flows are also there. It is difficult to predict, but don’t be surprised if the rupee actually scales back to the 72 level on flows.” 

In February, the foreign funds inflow remained positive in both equities and debt. The total foreign funds inflow in February, despite the coronavirus-related risk aversion, has been to the tune of Rs 3,917 crore.  



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