Though there may be a depreciating bias as central banks go on a tightening mode, the 2019 elections will attract FPIs, says Manju AB
When the central banks start tightening their easy monetary policies, the rupee is expected to remain unscathed. Forex experts do not see a repeat of the taper tantrums of 2013 that plunged the rupee to an all-time low of 68.08 to the dollar on August 28, 2013, when central banks including the US Federal Reserve start normalising their balance-sheets. This time around they say rupee is all new story. Foreign exchange reserves is at an all-time high close to $386.37 billion as on July 14, 2017, according to the latest available data from Reserve Bank of India (RBI). The current account deficit (CAD) is narrowing and inflation is at a record low.
The CAD expanded marginally to $3.4 billion (0.6% of GDP) in the fourth quarter of fiscal 2017, according to the preliminary figures released by the Reserve Bank of India and the inflation in June was at 1.5%, about 50 basis points lower than the lower band of RBI’s mandated target of maintaining inflation within 2% to 6%. CPI inflation excluding food and fuel, a key concern of the Monetary Policy Committee members, was at 3.9%, a record low.
Venkat Nageswar, deputy managing director, global markets, told DNA Money, said, “FPI inflows into the debt markets have remained strong for now as the new US administration has underwhelmed with major reforms like healthcare and corporate taxation dragging on. The US 10-year yields have failed to break above post election highs of 2.63% despite rate hikes. As long as this continues in the US, we expect FPI flows into Indian debt to remain strong.”
“Along with equity, FPIs invested an average of Rs 22,000 crore per month into India between March and June 2017,” Venkat said. He also does not expect any taper tantrum this time around with the rupee being a far stronger territory.
Deutsche Bank also recently revised its call on the rupee to Rs 66 to the dollar against an earlier prediction of Rs 67.5.% based on an assumption that the dollar may strengthen. It, however, cautions that slowing down of monetary easing may impact flows to emerging economies.
Kaushik Das, director & chief economist, Deutsche Bank, said in a report, “We expect the balance-sheet reduction programme of the Fed to potentially impact the flow dynamics in emerging economies, to which India may not remain immune. We now expect the rupee to end 2017 at 66 (versus 67.5 earlier) and we also revise our end-2018 forecast to 66 (versus 69.5 earlier). As far as the rupee is concerned, we are maintaining a slight depreciation bias against the dollar for the coming quarters but it is going to start appreciating again as FII equity investors start increasing their India-related exposure ahead of 2019 general elections.”
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