Rupee likely to stabilise in 2017

Indian rupee has fallen nearly 3% since demonetization on November 8. The banknote ban, which has curtailed the supply of rupee in cash form, is actually supposed to have reduced the overall demand for dollar. 

But US dollar has appreciated possibly due to conversion of old currencies into dollar at a substantial premium in the unofficial markets. This would have led to rise in the value of dollar in the official markets as well. But starting January 2017, this additional demand is expected to die down as the old high-value currencies cannot be converted into bank deposits.  

It is surprising to note that the Indian banks have quietly redeemed close to 90% of around $26 billion of Foreign Currency Non-Resident (FCNR (B)) deposits mobilised during the currency crisis in 2013. Despite such a huge redemption, rupee falling only about 3% post-demonetization shows its relative strength.

Moreover, Indian gold imports declined sharply by 55% year on year (yoy) to $7.88 billion during the first half of FY17. India’s gold imports are likely to decline further due to demonetization which has curtailed, in a big way, cash available for gold purchases. Freeing up of substantial dollars from gold imports would reduce the demand for dollar in a substantial way. 

Further, the foreign direct investment (FDI) into the country grew by over 30% yoy to $21.62 billion during the first half of FY17. Such robust FDI inflows also augur well for the reduced demand for the dollars.

The fear on rupee exchange rate also emanates from the spurt in oil prices, which leads to higher dollar demand. Oil price has moved up nearly 19% in last 7 days to over $55 a barrel now due to successful agreement by the OPEC to cut down the oil output. However, high oil prices may not be sustained for two reasons. There is no major uptick in the GDP growth in major economies like Japan, China and euro zone, which together account for about 1/4th of global GDP.  

Of course, the US economy has revised its GDP for the September 2016 quarter upward to 3.2%, which is quite robust. However, the US has become a net exporter of natural gas in November. It has been nearly 60 years since the US last shipped out more natural gas than it brought in annually. Further, the US oil rig count has also continued its rally last week. Since its trough in May 2016, producers have added 161 oil rigs (+51%) in the US.

Continued thrust on increasing the domestic energy resources by the US could thwart further rise in global oil prices. Thus, considering both domestic and global factors, rupee is likely to stabilize in 2017 with positive outlook.
The writer is founder and managing director, Equinomics Research & Advisory Pvt Ltd