In volatile times, rupee recovery may not yet happen in haste

In the past, various asset markets in general and equity markets in particular, across the globe, has had a tremendous bull run, post global financial crisis. Global central banks led by the US Federal Reserve devised unconventional tactics to surmount both liquidity and growth concerns by infusing unprecedented liquidity. 

Things started to change around the end of 2015 when US Fed started reversing the ultra-low interest rates and started giving forward guidance for further rate hikes. 

The European Central Bank has already started withdrawing its extraordinary liquidity infusing programme and has been broadly hinting at coming out of the ultra-low interest rates by the end of this year. 

Other major central banks including the Bank of England are also tightening the screws as growth and inflation pick up. That leaves only Bank of Japan, which is still providing liquidity at ultra-low levels. It’s a known fact that, as rates shoot up in developed market economies and as the liquidity dries up, scramble for quality assets become all the more prominent. Which means funds flow into emerging market economies comes under renewed pressure.  

The conundrum for emerging market economies becomes more complex as and when global oil prices surge. In the past and, especially, after the new US president took guard at the white house, various actions aimed at curbing Iran has led to a sharp rally in global oil prices. 

Countries like India, with a huge dependency on imported crude oil to fuel its ever-burgeoning fleet of vehicles, are staring at ever-widening trade deficit as exports do not usually keep pace. Exports from emerging markets also have been inelastic as the new US administration espouses protectionism. This has resulted in a trade war with many nations, notably China.  

In the case of India, exports have remained more or less inelastic and have not grown in the similar proportion as imports have multiplied. Further complications arise if a country’s currency is overvalued in real effective exchange rate (Reer) terms. The rupee was far more overvalued which needed a sharp correction. If we throw in a little bit of political uncertainty into this matrix, it becomes all the more complicated. 

The outcome in the forthcoming state elections in some of the important states could be a pointer towards what lies in store in 2019. For investors into Indian assets, taking a call becomes all the more difficult even if the country provides an attractive option otherwise (due to demographic dividends, consumption-led growth and other factors). 

Hence, it was not very surprising to see the rupee lose steadily against the dollar in the backdrop mentioned above. But the fact that the rupee has been one of the worst performing currencies in the whole of Asia, is being highlighted by one and all. That’s not rare though. 

It’s worthwhile to note that, I have not been able to foresay that the rupee would move beyond 74 level based on my earlier calculations. However, we also should note another important fact that the rupee does rebound after bouts of extreme volatility.  

I can’t really predict with the current environment but what I can interject is that there seems to be a resistance at 74.3000-5000 area which may not give way too easily. Therefore, it may be worthwhile to keep that in mind while strategising hedge requirements for both importers and exporters. I am tempted to put a 72.8000-74.3000 range to play out in the next few weeks as far as the dollar-rupee pair is concerned. 

CURRENCY WAR

• India is staring at ever-widening trade deficit as exports not keeping pace 
   
• Exports have remained more or less inelastic and have not grown in similar proportion as imports

The writer is senior regional head - treasury advisory group, HDFC Bank