Rupee slide nearing its end, RBI likely to step in, say economists

Government officials seem to be favouring a weaker rupee
The rupee could be hovering around the last leg of its fall, but depreciation pressure would continue a little longer, economists and currency experts have said.

The rupee should consolidate around the present level, but global sentiments could push it back to 72-72.5 a dollar level. By December though, rupee should be able to claw back to the 70 level as dollar is showing signs of weakness against major global currencies and oil supply issue is correcting on increased production from major oil producing nations.

But it will take time. At least in September, rupee is unlikely to strengthen unless the Reserve Bank of India comes up with heavy intervention, which is unlikely to happen as the central bank has already shown its intent not to protect a level at a time when other emerging markets currencies are sliding.

“I think it’s (rupee slide) more or less done,” said Hitendra Dave, head of global banking and markets for HSBC India.

Also, the 70-level could be the new normal for the rupee, unless there is a strong reason for investors to become bullish on emerging markets economy, said Ashish Vaidya, head of markets, DBS Bank.

However, predicting a rupee level is hazardous at this point, given the dynamic geo-political situation prevailing in the world. Currencies of Argentina and Turkey have seen a rout. The Indian rupee has fallen more than 10 per cent since January, making it the worst performing in Asia in that period.

Besides, government officials seem to be favouring a weaker rupee. It helps aid in exports, and skirts any sanctions imposed on Indian exports.

But there is nothing much to panic.

“Rupee is not alone in this depreciation move. So many other currencies are also losing out against the dollar. In terms of macroeconomic fundamentals, we are in a much better position that we were in 2013,” said Ashish Parthasarathy, head of treasury at HDFC Bank.

Aditi Nayar, principal economist at ICRA Ltd, expects rupee to be in the range of 70-72 a dollar by December. But there are a number of factors that can automatically help rupee recover.

The crude oil prices are showing heightened volatility. Although it is trading at $76-77 a barrel, already economists are giving a call that it could fall to $70 a dollar. “The borrowing programme and the open market operations (RBI’s bond purchase) would affect foreign portfolio flows and could stabilise the rupee,” said Nayar.

One point to be noted here is that the recent loss in rupee is not led by portfolio outflows, they have been positive in August, but the loss has been exacerbated by a sudden increase in dollar demand in August-end.

“By December, rupee could be in the range of 71.50-72.50. But in the immediate term, heightened risk aversion would continue to push for emerging markets sell-off,” said Satyajit Kanjilal, managing director of Forexserve.

"Rupee is really in an uncertain trajectory where a sharp reversal is possible. Whether the reversal happens from 71 level or from 75 level is the bigger question,” said Samir Lodha, managing director of QuantArt Markets Solution.

“More importantly, hedge strategies need to recognise the possibility of sharp moves in both ways and ensure that hedging is not detrimental. We are seeing significant use of options as hedge strategy and the same is working well for companies.  That's a big change — increased use of options," Lodha said.

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