The rupee ended 2018 on a positive note as it recovered against the dollar from the loss of 74.50 and above in September and October and closed at the level of 70 in December 2018.
We are expecting few domestic factors like the Lok Sabha elections, current account deficit and Indian stock market to play a crucial role in the movement of dollar-rupee while globally the interest rate decision by the US Fed and crude oil prices shall determine the dollar movement against the rupee in 2019.
Let's look at the domestic factors . The most important factor for 2019 is a general election which is round the corner. As the economy has seen the revolutionary decision by the existing government to implement demonetisation and GST within the term of last five years, the global markets and investors are looking at the existing government with the high respect and as we have seen the foreign direct investment in India at the highest in 2018 compared to last 20 years is the sign of the same.
In case of the government, coming back to power we will see FDI in India increase multifold which will increase the dollar reserves of India. In case the existing government goes out of the power and new government comes without a clear mandate to any party then it will be a negative impact for Indian economy and we can see uncertainty in global investors towards India which can not only reduce investments in the Indian market but it can see the pull out of the funds from Indian market. One of the biggest factors for the Indian economy and further guideline for equity market is largely dependent on the election results.
Now, if we look at the current account deficit, we have seen quite a handsome improvement in the current account deficit numbers in last five years which was mostly supported by lower crude prices which gives a government opportunity to increase the duties and taxes on sale of petrol and diesel to finance public expenditure and reduce the gap between income and expenses.
CAD is dependent on two macroeconomic factors — crude prices in the global market and foreign investment in Indian market. In case we see something positive in both these areas then we can see the rupee will have a good run in 2019.
Now let's look at the equity market. The amount of GST payment and data release from the various industry has shown better performance by Indian companies which will result in recovery of stock market compared to the last quarter of calendar 2018. We have seen that political uncertainty can cause weakness in equity market and pull out funds from foreign investors, we may see the general election results can put a pressure on the Indian equity market for some period of time which will cover almost 2019 in a full apart from the action results and performance of equity market we can also see movement in equity market based on global factors which can be a geo political tension or a trade war between China and America.
Now look at global factors which can drive the Indian rupee. The expected US interest rate rise is estimated to be 2 instead of 4 in 2019 which will result in weakness in the US dollar. We have also seen crude going to the highest level in 2018 and coming down to the lowest level in last two years, showing vulnerability in crude prices. Both these factors are helping the rupee at this point of time against the dollar. But, as OPEC has announced cuts in production, we may see some upside in the crude prices again.
We also have to consider that demand for crude is the lowest in last two years which can cause reduction in the prices – we can say crude can remain in the broad range of $37 to $54 in 2019 which is a positive sign for Indian rupee.
We can say the rupee is going to remain under pressure in the first half of 2019 based on the political condition and we'll see some sort of stability coming in rupee after the election results. We can consider that the rupee will remain at the sub-70 level in the first quarter of 2019 and we see level of 68.80 and 68.0 in the first quarter of 2019. Near to the election we will see pressure building on the rupee and it can breach 70 level again and trade in the range of 72 to 73. The direction in rupee is expected to be determined after the election results in the second half of the calendar year. The range for the year is expected to remain between 68.50 to 75.00.
(The writer is CEO, Veracity Financial Services)