Rupee may move up, albeit in short term

Global asset prices, especially financial assets, have ballooned in the previous months thanks to ample liquidity slushing around in the system. Hence, it has now become a religion for all of us to look closely at statements issued by US Federal Reserve (Fed), ECB and BOJ, in that order. In their June statement, FOMC had stated about their intention to start balance sheet normalisation programme, which roughly meant that Fed would start liquidating some of their horde of US papers (totaling around US$ 2.4 trillion) and thus suck out liquidity from the system.

Everyone went about estimating the date of such action and the premise that Fed would depend to start the programme of normalisation. In the latest FOMC concluded on July 26, 2017, the committee held that, "the Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated; this program is described in the June 2017 Addendum to the Committee's Policy Normalization Principles and Plans." The tone and tenor of FOMC statement had been dovish, thus pushing dollar lower.

The political scene in US against a background of investigation into US presidential elections is not helping matters at all for dollar as well. With this background, the broad Dollar Index has pierced a few important technical levels and is approaching another important support level at 92.45. From the construct of the dollar Index movements on both daily and weekly charts, it's still looking bearish and can go towards 92.45 from the present level of 93.28 in a few trading sessions.

Euro, GBP and even EM currencies have been major beneficiaries of this broad fall in Dollar Index. For example, euro has now rallied to a 30-month high against US dollar and GBP also has rallied nearer to pre-Brexit levels, despite long drawn process in front of Britain to get out of the euro Area. Negotiations would be tough and grueling and also time consuming for both the parties. Given this back ground, appreciation in GBP looks limited to me. As far as euro is concerned, it is now threatening to breach a very important Fibo level placed at 1.1796 (against US$). If that had to happen, which has a high likelihood now, we should be staring at 1.20 for euro/USD in the near term. The move from here could be a little labored, given that the past move up has been pretty pronounced. Emerging market (EM) currencies have seen a change in fortune in the back ground of (i) receding fear about US "protectionism", (ii) diminishing chances of a "hard landing" in China as well as (iii) unsustainable fear about loss of EM exports over softer global commodity prices.

Given the above context and the fact that there has been steady flow of funds into Indian equity/debt markets, the rupee has remained one of the better-performing EM currencies. For the record, FII net investment in Indian debt and equities this fiscal is at a robust US$ 14 billion as against previous fiscal figure of $8 billion. Trade deficit figures also look a little positive due to improving exports. Given this background, short-term rupee appreciation against the US dollar is expected.

The USD/INR pair is most likely to remain in a range of 63.80-64.50 range. Latest Indian CPI showed a deceleration in core inflation and now demand for a rate cut in the RBI's forthcoming policy has reached a crescendo. I am with majority here in expecting a 25 bps rate cut in the forthcoming RBI policy.

In summary, US dollar weakness to sustain and rupee to have limited appreciation bias intact.

STRONG INFLOW BOOST

• Rupee’s performance better than other EM peers and trade deficit figures are looking up on better exports
   
• FII net investment in Indian debt and equities this fiscal is at $14 billion as against previous fiscal

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