'Rupee will be first emerging market currency to bounce back'

On Tuesday, a day after the bloodbath in equities, the rupee opened slightly stronger to the dollar, but soon pared gains. During the trading session, the Indian currency remained choppy, and was at 66.13 to a dollar, up 51 paise from previous day's close.

On Monday, the rupee had inched closer to the 67-level, having breached the crucial 66-level in the same trading session. The rupee has been under stress against the dollar for the last two weeks, since China first devalued its currency to make its exports more competitive in the world markets.

The move has had emerging market currencies riding at multiple-year lows. South Africa's rand is struggling at 14-year lows. The Turkish Iira, a is down to a record low, and the Malaysian ringgit is at a 17-year low. The rupee is down to a two-year low. 

A report by India Ratings released on Monday said that a 1% depreciation in the rupee value is expected to reduce the absolute EBITDA of net importers by 0.19% (median). 

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During Monday's freefall, both, Finance Minister Arun Jaitley and RBI Governor Raghuram Rajan strived to allay fears by stating that India's factors are strong. While Rajan said that India is in a better position than other countries, including the Indian currency, Jaitley said that, parameters in India are on a strong footing, blaming China's rout completely for Monday's fall. 

India Ratings' Senior Director Deep Mukherjee told dna that the Indian rupee will be the first among emerging market currencies to bounce back. This, he says, is on the back of stronger fundamentals and the Real interest rate of the rupee.

The Indian rupee's real interest rate, released by the World Bank is much better than it was in FY13 and and FY14, Mukherjee said. 

Real Interest Rate that is released by the World bank is an indicator that makes the currency of a country attractive to foreign investors, he said. 

The World Bank defines Real interest rates as the lending rate adjusted for inflation as measured by the GDP deflator.

India's Real Interest Rate has been consistently improving since 2010, and was indicated at 6.2% by the World Bank in 2014, much better than that set for most emerging market currencies. 

Currently, "the Current Account Deficit in the country is firmly in check, given the commodity down-cycle and low level of capex activity, thereby reducing capital goods imports," the report says. Lending rates have fallen by 30-70bps compared to FY14, inflation is at record lows, and the rupee has improved fundamentally, Mukherjee added. 

All these economic indicators and fundamentals indicate that since 2014, when the World Bank last released the Real interest rates, the rate would have only improved. 

Overseas investors have also pulled out nearly Rs 2,000 crore from the Indian stock markets since the beginning of the month. This is in contrast to a net inflow of Rs 5,319 crore by Foreign Portfolio Investors (FPIs) in equities last month. However, Mukherjee said that this is no reason to panic as FIIs usually exit emerging markets together. They treat emerging markets as a basket, and with increasing concerns about the health of emerging economies, they have been exiting, he said. FII will flock the market again when the economic scenario is better, he added. 

Given the strong fundamentals, a relatively strong Real interest rate among prominent markets, making the Indian unit attractive to overseas investors, Mukherjee is of the view that the rupee will be one of the first emerging market currencies to bounce back.