The rupee, which has recovered nearly 10% from its all-time lows in the last 12 sessions, will find it hard to reclaim more ground in the near term, experts would have us believe.
Going by them, with the positive global factors having already played out and the Reserve Bank of India (RBI) shifting focus to fighting inflation, slowing economic growth could well slow down inflows from overseas investors, particularly foreign institutional investors (FIIs).
To be sure, the day after the US Federal Reserve decided against tapering its bond buying programme, the rupee fell 0.81% as the RBI in its monetary policy took a hawkish stance on inflation.
Craig Chan, head of Asia ex-Japan forex strategy at Nomura, believes the RBI’s decision to hike the repo rate by 25 basis points to 7.5% was a surprise to the market and is likely to be negative for the rupee in the short-term.
“Although positivity on the rupee had been returning, as reflected in the recent pick-up in net foreign equity inflows ($1.2 billion month-to-date vs three previous months of net outflows), Friday’s moves from the RBI could slow equity inflows even though they were likely to have been largely driven by the improved global backdrop (lower Syria risks, Larry Summers withdrawing from the Fed chair role, and the surprise recent US FOMC decision),” Sonal Varma, Craig Chan and Vivek Rajpal wrote in a note on Friday.
Wells Fargo Securities, too, believes that the road ahead remains tough for most emerging market currencies despite the sharp bounceback after the Fed decision.
“Although these currencies could continue to enjoy some favourable tailwind in the near term, we don’t believe a meaningful recovery is around the corner. The Fed may have chosen to not taper this week, but it will do so eventually. Therefore, a sharp decline in US Treasury yields probably will not occur, preventing massive erosion in the relative attractiveness of US financial assets. Unless the Fed continues quantitative easing indefinitely, which we do not think is likely, emerging market currencies probably will not strengthen anytime soon,” economists at Wells Fargo wrote in a note on Friday.
However some experts believe the RBI itself would stem any sharp appreciation in the rupee, in a bid to control the sharp volatility.
Having done precious little to stem the local currency’s fall, the central bank needs to commit itself to controlling the volatility, said Neelkanth Mishra, head of equity strategy at Credit Suisse.
“The Fed not tapering its bond purchases in its September meeting now makes strong appreciation very likely. After all, even without any additional FII equity or debt flows, just the OMC (oil marketing company) swaps and FCNR (foreign currency non-resident) swaps effectively help flows by $9-10 billion/month.
The rupee in the last three months has been the most volatile ever in history. Stepping in at a certain level of their choice, and holding the currency there for a few months, would be important. After all, the “taper” has not been indefinitely postponed, and some of the capital flows may reverse again,” Neelkanth Mishra, head of equity strategy at Credit Suisse, wrote in a note on Friday.
The analysts at Nomura believe that given the RBI’s focus on inflation, there is less possibility now of the rupee breaking past its recent high of around 61.70 versus the dollar in the spot market.
Mishra, on the other hand, believes the rupee’s appreciation may be over within 2-3% of current levels