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Where is the rupee headed? Experts weigh in

Rupee hit a record low of 70 to the US dollar, making it the worst currency in the Asian region thus far in calendar year 2018 (CY18). The fall comes on the back of Turkey-led sell-off over the past few sessions. 

"The Turkish lira (TRY) has plunged 25% in a week (45% year to date). A heady mix of high foreign debt, large CAD and deteriorating political situation has rendered Turkey quite vulnerable. But what has been perhaps more critical is the upward pressure on global interest rates in 2018 owing to an aggressive Fed and US fiscal stimulus. How this situation evolves hereon hinges on Turkey’s policy response," point out analysts at Edelweiss in a report.

Adding: "In our view, it would be a mistake to see this as only a country-specific phenomenon; there is a larger dynamic at play. Credit cycles in several EMs remain weak and domestic debt is high, and thus they are incapable of chasing Fed rates higher. This dynamic shows up in the pressure on EM BoP, which tightens liquidity and potentially hurts growth."

Here's how experts interpret the recent developments:

Moses Harding John, CEO, India & East Africa at SBM Holdings

USD/INR appreciation from 68.35-68.85 consolidation into 69.65-70 was not a unpleasant surprise, but the timing of it caught most on the wrong foot, more so when this INR fall from 68.50 to 70 is not triggered by factors such as bullish momentum on Brent Oil value or USD strength against major currencies or higher USD interest rates. 

This sudden fall is from the fear of potential Turkish Lira impact on Emerging Markets currencies, from which rupee value can’t stand out when current account deficit is moving up sharply and flows into capital account is on decline. The comforting factor, however, is the optimism on domestic macroeconomic fundamentals, optimism on growth and comfort on inflation & fiscal deficit.

The way forward is not good for the rupee with certainty that intra-2018 USD/INR base is now up from 63.15-63.50 to 68.50-68.85. This sudden value depreciation of INR is major discomfort for importers, squeezing the operating margin. But, seen good to support exporters and to attract long term foreign direct investments to support the “make in India” agenda, which has not yet taken off  and one of the reason being the strong INR value. 

The short term outlook for rest of 2018 is for rupee stability against USD at 68.50-72, significantly down from 63.50-68.50, and it would be good for stability around 70 rather than pushing the Rupee down by more than 10% in 2018. The supporting comfort emerge from higher probability of Brent Crude stability at $70-75, US interest rate stability from probable extended pause stance from FED restricting the policy rate not beyond 2.25-2.50% and DXY in consolidation mode at 95-98. All combined, there is nothing to panic and the current rupee value adjustment from 63.50-68.50 to 68.50-71.50 should do more good than harm to the Indian economy and financial markets.

Abheek Barua, chief economist, HDFC Bank

From the perspective of FX markets, it could be a double whammy. One, the lower probability of a rate hike in October could be a mild-negative for the rupee. Meanwhile, the negative sentiment (related to Turkey’s crisis) could continue to play today as well. 

As highlighted recently, in a momentum trade, fundamentals play very little role. Thus despite the fact that fact India’s is significantly better in terms of its vulnerability ratios, the run towards safe-haven assets (US and Japan treasuries in particular) in such an environment could lead to some short-term depreciation in the rupee.

B. Prasanna, Group Executive and Head – Global Markets Group, ICICI Bank’.

The Rupee is the victim of a contagion effect impacting all Emerging Markets (EMs) triggered by the Turkish crisis. The gradual pace of depreciation witnessed till 69 levels are a result of the Yuan depreciation and the current account deficit worsening sharply from 0.6% of GDP in FY17 to an expected deficit close to 2.5% of GDP this year, stemming from surging oil prices and worsening of the already negative basic BoP. 

The swift move past 69 happened due to Foreign Institution Investor (FII) outflows and the need to hedge existing short Dollar positions in the market, driven by global market sentiment rather than actual importer demand. 

On a medium term basis, the Rupee will need to depreciate further to keep up with the inflation differentials with other trading partners. However there could be a minor reversal of this depreciation on a short term basis when the global situation stabilises.

Sajal Gupta, Head forex & Rates Edelweiss Securities

While we envisaged INR possibly breaching the 70/USD mark by October, it breaching the 70 levels today reflects the fact that we will likely remain fragile and dependent on global noises and will follow global FX suit. 

On the back of global market turmoil and emerging domestic vulnerabilities, INR can further see new low levels against the dollar from here on unless we see some stability in global FX space on geopolitical front. The central bank is not expected to target any level but will likely intervene to ease volatility in the  FX market. However, we do not rule out any preventive policy action or announcement to contain the recent sharp volatility in the rupee.

 
Technical view: Anand Rathi Securities

Absence of aggressive intervention by the RBI has spooked the market. Since the rupee has plunged to 70 levels, 70.50 level will be the next short term resistance while 71 will be the important level to watch out for. On the downside, immediate support is around 69.30 levels.

Ajay Bodke, CEO for portfolio management services at Prabhudas Lilladher

The rupee touching 70 is likely to create fresh optimism in the street on Indian IT. ( Average rate for FY18 was 64.5 and 1QFY19 was 67.5). Ceterius paribas, a 1% rupee depreciation could aid EBIDTA margins by ~30bps and EPS ests by 1.7%.   

However, in reality companies have not benefited from the rupee's deprecation. While the rupee fell from 45 in FY11 to 65 in FY18 against the US dollar, margins for Indian IT vendors have actually dropped during this period. We note 40-55% of revenues are now derived from fixed price projects. If rupee remains at these levels, (USD vs INR at 70 which is a 10% drop YoY from FY18), vendors would start taking the new rate when going for bidding for new deals and hence cut USD pricing. HCL Tech has already mentioned this in 1QFY19 concall. 

Hence, steep EPS upgrades for FY20 EPS assumptions are unwarranted in my view. Relatively cheaper P/E stocks might give higher alpha in this sentiment led rally (HCL Tech trading at 12.8xFY20 EPS. TCS / Infosys trading at 23/18x FY20E EPS are relatively trading at higher valuations). Among midcaps, Cyient (15x FY20E EPS), Mindtree (18x FY20E EPS) might have some headroom for rally. Mindtree is likely to deliver 20% USD revenue growth in FY19.


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