Exports, crude to keep rupee down

Weakening exports, rising crude prices and a stronger US dollar are pulling down rupee even as foreign portfolio investor (FPI) inflows into the stock markets have seen some uptick in recent times.

Economists see the rupee under pressure in the remaining part of the current fiscal with the global growth expected to slow down and the decision of the Organization of Petroleum Exporting Countries (Opec) and the non-Opec players, including Russia, of cutting oil production by 1.2 million barrels per day.

Madan Sabnavis, chief economist of Care Ratings, said the latest trade numbers were not positive for rupee as exports growth in November decelerated to 0.8% even as the year-on-year (yoy) trade deficit widened 10.90% to $16.67 billion against $15.1 billion in the same month last year.

On a sequential basis, the trade deficit narrowed 2.68% last month from $17.13 billion in October.

"It is a combination of the greenback strengthening and India's trade numbers not being positive. Exports continued to slow down and trade deficit is also widening," he told DNA Money.

A 30% slump in crude prices had propped up the rupee to below 70 a dollar last month after hitting a high of 74.48 against dollar in October. However, with crude prices slowly firming up and export numbers indicating a slowdown, the Indian currency looks to be shedding most gains made in November.

It fell to 71.90 a US dollar last Friday following a 22 paise loss. On the same day, it had touched day's low of 72.04 per dollar as a stronger dollar left the markets a little jittery.

Sabnavis said the "only positive" in the currency market to be watched closely was the FPI inflows; "we have to see whether the FPI inflows that have turned positive continue to remain positive".

Last month there was an inflow of close to Rs 2,000 crore by foreign investors into the capital markets as crude prices eased and rupee value appreciated. Higher crude prices hit India's macros adversely as it meets more than 80% of oil needs through imports.

Many economists also see the recent appointment of new Reserve Bank of India (RBI) governor lending to the uncertainty in the currency market.

D K Srivastava, chief policy advisor at EY India, told DNA Money exports "not perceived" to be growing at a fast pace may keep the rupee pinned down.

"The present influence on rupee is mostly because exports are still weakening. Till Indian exports start to pick up and are not perceived to be increasing at a fast pace, and as long as crude prices remain within range, I think, there may be some exchange rate depreciation. But it could be mild," he said.

In November, exports dipped 1.9% over the previous month. It was down to $26.5 billion from $27 billion in October.

The month also saw imports relatively grow at a faster clip of 4.3%. This has skewed India's trade balance in favour of imports. A large part of the imports is being driven up by rising electronic goods imports.

Srivastava said some revival in FPI was providing a cushion to the rupee and expected the rupee to return to stability if the crude prices remain within range. He estimates rupee to vacillate between 70 to 73 a dollar.

According to him, exports will be on a downtrend as long as the tariff war continued.

"Until these (trade wars) get resolved and settles down, I think the pressure on exports will remain, and it would be somewhat volatile. But by and large on the downward side," the EY economist told DNA Money.

Recently, the crude prices had jumped 5% after the US-China took a decision for a 90-day truce in the trade war. This dragged the rupee lower.

Both Sabnavis and Srivastava believe the stance taken by the RBI governor on prompt corrective action (PCA) and transfer of reserve funds to the government would also be critical to which way the rupee moved.

Slower than expected growth in exports threatens to widen the current account deficit (CAD) in the current fiscal to around 2.5% of the GDP from 1.9% of the GDP last year. The wider gap in CAD will also not be good for rupee.

"CAD would be dominated largely by crude prices. If they remain benign I think CAD could be 2.5% of the GDP or so," said the EY economist.

CAD estimates have recently been lowered by most economists after it touched a four-year high at 2.9% of GDP in the September quarter.

Sabnavis said tensions in global trade can turn the current positive inflows of foreign exchange to negative.

"As long as FPIs are positive it means that India is not viewing anything negative. However, if there is some kind of (global trade) tension, then we can expect FPI to turn negative. Right now, the FPIs are positive. Therefore, one can assume it's not going to have any negative bearing on rupee," he said.

The Care Ratings economist forecasts the rupee to be in the region of around 70 a dollar by March next year. He believes the review of the US waiver to India against Iran oil sanctions around April is likely to weaken the rupee.

"Rupee value will depend on what are the global tensions and the review of Iran sanctions relaxation (to India) issue by April, which will come up for discussion at the end of six months. That might put pressure on the rupee to depreciate further," he said.

PINNED DOWN

• 0.8% – drop in exports growth in November
   
• 10.91% – rise in trade deficit in the last month year on year
   
• 2.5% – Current account deficit likely to widen to this fiscal