Rupee runs into seasonality wall after best Q1 since 1975

Tags: News
The rally that’s made the rupee Asia’s best performer in the past three months is threatened as the Indian currency enters a seasonally weak period.

The rupee has declined in each of the last seven April-June quarters, with its performance often marred by a periodic increase in India’s gold demand. This time, rising Brent crude prices are also seen weighing down the currency. Asia’s third-largest economy is the world’s second-biggest buyer of the precious metal and relies on imports for about three quarters of its oil needs.

“Gold prices are going up, plus we expect oil prices to stay firm, which may put pressure on India’s current account,” said Vishnu Varathan, a senior economist at Mizuho Bank in Singapore. Broad dollar strength — due to a weaker euro and geopolitical risks — will weigh on the rupee, he said.

Gold purchases by India are expected to pick up heading into Akshaya Tritiya, a Hindu bullion-buying festival that is usually celebrated late April or early May. The period is also considered auspicious for marriages, where gold is bought as part of the bridal tro­usseau or gifted in the form of jewellery by relatives.

India’s rupee will slide to 66.50 per dollar by the end of June, according to the median estimate in a Bloomberg survey. That’s 2.8 per cent weaker than the currency’s close of 64.63 in Mumbai on Tuesday. It is up 0.3 per cent in April.

Bullion imports in March more than quadrupled from a year earlier as jewellers stocked up anticipating demand during the wedding season. That caused the trade deficit to widen to $10.4 billion from $4.4 billion in March 2016. The nation’s current-account gap has increased in four of the last six April-June quarters, data compiled by Bloomberg show.

The rupee rallied 4.7 per cent between January and March, the most for any first quarter since 1975, as foreign investors poured over $12 billion into local stocks and bonds after a thumping win for PM Narendra Modi’s party in key state elections boosted bets for more economic reforms.

The currency’s 5.5 per cent advance in the three months through Monday is the biggest in Asia.

The surge, uninterrupted by any strong central-bank intervention, has prompted analysts to say that policy makers are growing more tolerant of the gains, given a likely pickup in inflation and the risk that excessive intervention would add to the flood of cash in the banking system.

“The rupee has gained quite substantially and it’s set to reverse the trajectory and weaken this quarter,” said Tushar Arora, a senior economist for treasury at HDFC Bank, India’s largest lender by market value. “Our expectation is based primarily on the premise that the dollar will gain, and as the domestic liquidity situation normalises, the Reserve Bank of India will get more room to intervene in the foreign-exchange market.”

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