But will be among stronger emerging market currencies
The rupee is likely to stay under pressure due to evolving domestic uncertainties, weakening foreign trade and improving US monetary conditions. Frantic investment outflows from the country against the backdrop of buoyant dollar sentiment is likely to keep the home currency under immense pressure with currency experts forecasting a range of 66 to 72 levels in 2017.
However, on Wednesday, the rupee gained 0.42 per cent, the maximum in one month against the US dollar tracking gains in the Asian currencies markets. The Indian rupee opened at Rs 68.28 against the dollar and closed at Rs 68.05, up 0.42 per cent – its highest since December 6, from its previous close of 68.33.
Since April 1, 2016 to date, the rupee has fallen 2.5 per cent. The 10-year 6.96 per cent 2026 bond ended up 54 paise at Rs 104.30 while the yield was at 6.37 per cent, a level last seen on December 6. Most currencies were trading higher for the day. China Offshore spot was up 0.89 per cent, Singapore dollar up 0.53 per cent, China renminbi up 0.38 per cent, Japanese Yen 0.28 per cent, Indonesian Rupiah 0.27 per cent, Malaysian Ringgit 0.08 per cent, Thai Baht up 0.34 per cent, and Philippines peso 0.11 per cent. However, the South Korean won was down 0.24 per cent.
The dollar index, which measures the US currency’s strength against major currencies, was trading at 102.89, down 0.31 per cent from its previous close of 103.21. On the global commodity front, crude oil prices continued to move higher on expectations that US crude inventories are falling and that signs that oil producers will stick to agreed output cuts which took effect this week. In 2016-17, foreign institutional investors have bought Rs 14,491 crore in equity, while they sold Rs 35,138 crore in debt.
A weak dollar sentiment across the board alongside unwinding of long positions by speculative traders ahead of key US macro data release largely supported the recovery momentum for the rupee.
Soumyajit Niyogi, associate director at India Ratings and Research said, “Most emerging market currencies are under pressure. However, the weakness is not as severe in the rupee. The pressure will continue as expectation of a Fed rate hike will remain. Secondly with the US treasury yields rising one per cent and the 10-year Indian G-Sec falling 0.5 per cent, the returns from Indian government debt after a hedging cost (one year forward premium is above 5 per cent) has turned negative which is making them net sellers.”
Speaking about the Reserve Bank of India’s (RBI) strategy, Niyogi said, “With most emerging market currencies depreciating, the RBI will not intervene much. The central bank will continue to intervene to weed out volatility and not to protect any level.”
Abhishek Goenka, founder and chief executive officer at India Forex Advisors said, “The US yields are likely to continue moving higher and as a result the US dollar is likely to strengthen against major currencies. We could see the US 10 year benchmark moving towards 3.4 per cent and dollar index touching 110 levels. Though the rupee is likely to be one of the better performing emerging market currencies, one can expect to see a new all time low for the domestic currency against the US dollar in 2017. Historically, a US rate hike cycle has been a drag on emerging markets. A test of 71 for USD-INR within the year would not come as a surprise.”
The US Federal Reserve has increased the number of projected interest rate hikes for 2017. It also raised its key short-term rate on December 14 by a quarter point, from a range of 0.25 to 0.5 per cent to a range of 0.5 to 0.75 per cent. This was the first interest rate increase in the US in the calendar year 2016, and only the second in this decade. Fed also indicated that it sees a brightening economic outlook and now expects the median federal funds rate to be 1.4 per cent by end-2017, reaching 2.1 per cent at end-2018 and 2.9 per cent in 2019. In addition to global factors, the rupee’s weakness has also intensified due to weak domestic factors, for instance the trade deficit for November 2016 came at a 16-month high ($ 13 billion).
The USD INR rate is influenced by multiple factors, most important being the DXY (index indicating the strength of the US dollar), fund inflows by foreign institutional investors, and domestic macroeconomic factors largely represented by GDP growth and inflation.
At the beginning of last year, the rupee on January 1, 2016 was at 66.23 levels and while it was impacted, it weathered several dramatic events such as the China’s stock market slumps on January 4 and 7 and again on June 14 followed by the outcome of the Brexit referendum. Then came another significant event in the forex market: the announcement by Raghuram Rajan, the then governor of Reserve Bank of India (RBI) to hang up his boosts (in June) and his subsequent exit in September. However, the double whammy came with news on November 8 that Donald Trump had been elected the 45th US president after a stunning victory and the government’s political punt demonetising Rs 500 and Rs 1,000 banknotes.
Forex reserves too, have declined. India’s foreign exchange reserves dipped $2.4 billion to settle at $360.6 billion, one of the lowest levels since May of this year, as RBI continued to sell dollars heavily in order to arrest the slide in the value of the rupee.
falaknaazsyed@mydigitalfc.com
However, on Wednesday, the rupee gained 0.42 per cent, the maximum in one month against the US dollar tracking gains in the Asian currencies markets. The Indian rupee opened at Rs 68.28 against the dollar and closed at Rs 68.05, up 0.42 per cent – its highest since December 6, from its previous close of 68.33.
Since April 1, 2016 to date, the rupee has fallen 2.5 per cent. The 10-year 6.96 per cent 2026 bond ended up 54 paise at Rs 104.30 while the yield was at 6.37 per cent, a level last seen on December 6. Most currencies were trading higher for the day. China Offshore spot was up 0.89 per cent, Singapore dollar up 0.53 per cent, China renminbi up 0.38 per cent, Japanese Yen 0.28 per cent, Indonesian Rupiah 0.27 per cent, Malaysian Ringgit 0.08 per cent, Thai Baht up 0.34 per cent, and Philippines peso 0.11 per cent. However, the South Korean won was down 0.24 per cent.
The dollar index, which measures the US currency’s strength against major currencies, was trading at 102.89, down 0.31 per cent from its previous close of 103.21. On the global commodity front, crude oil prices continued to move higher on expectations that US crude inventories are falling and that signs that oil producers will stick to agreed output cuts which took effect this week. In 2016-17, foreign institutional investors have bought Rs 14,491 crore in equity, while they sold Rs 35,138 crore in debt.
A weak dollar sentiment across the board alongside unwinding of long positions by speculative traders ahead of key US macro data release largely supported the recovery momentum for the rupee.
Soumyajit Niyogi, associate director at India Ratings and Research said, “Most emerging market currencies are under pressure. However, the weakness is not as severe in the rupee. The pressure will continue as expectation of a Fed rate hike will remain. Secondly with the US treasury yields rising one per cent and the 10-year Indian G-Sec falling 0.5 per cent, the returns from Indian government debt after a hedging cost (one year forward premium is above 5 per cent) has turned negative which is making them net sellers.”
Speaking about the Reserve Bank of India’s (RBI) strategy, Niyogi said, “With most emerging market currencies depreciating, the RBI will not intervene much. The central bank will continue to intervene to weed out volatility and not to protect any level.”
Abhishek Goenka, founder and chief executive officer at India Forex Advisors said, “The US yields are likely to continue moving higher and as a result the US dollar is likely to strengthen against major currencies. We could see the US 10 year benchmark moving towards 3.4 per cent and dollar index touching 110 levels. Though the rupee is likely to be one of the better performing emerging market currencies, one can expect to see a new all time low for the domestic currency against the US dollar in 2017. Historically, a US rate hike cycle has been a drag on emerging markets. A test of 71 for USD-INR within the year would not come as a surprise.”
The US Federal Reserve has increased the number of projected interest rate hikes for 2017. It also raised its key short-term rate on December 14 by a quarter point, from a range of 0.25 to 0.5 per cent to a range of 0.5 to 0.75 per cent. This was the first interest rate increase in the US in the calendar year 2016, and only the second in this decade. Fed also indicated that it sees a brightening economic outlook and now expects the median federal funds rate to be 1.4 per cent by end-2017, reaching 2.1 per cent at end-2018 and 2.9 per cent in 2019. In addition to global factors, the rupee’s weakness has also intensified due to weak domestic factors, for instance the trade deficit for November 2016 came at a 16-month high ($ 13 billion).
The USD INR rate is influenced by multiple factors, most important being the DXY (index indicating the strength of the US dollar), fund inflows by foreign institutional investors, and domestic macroeconomic factors largely represented by GDP growth and inflation.
At the beginning of last year, the rupee on January 1, 2016 was at 66.23 levels and while it was impacted, it weathered several dramatic events such as the China’s stock market slumps on January 4 and 7 and again on June 14 followed by the outcome of the Brexit referendum. Then came another significant event in the forex market: the announcement by Raghuram Rajan, the then governor of Reserve Bank of India (RBI) to hang up his boosts (in June) and his subsequent exit in September. However, the double whammy came with news on November 8 that Donald Trump had been elected the 45th US president after a stunning victory and the government’s political punt demonetising Rs 500 and Rs 1,000 banknotes.
Forex reserves too, have declined. India’s foreign exchange reserves dipped $2.4 billion to settle at $360.6 billion, one of the lowest levels since May of this year, as RBI continued to sell dollars heavily in order to arrest the slide in the value of the rupee.
falaknaazsyed@mydigitalfc.com
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