Many factors, including softening oil prices, are cited as reasons
While Indian rupee witnessed a highly volatile year in 2013, the currency stabilised in the current calendar year.
Come 2015, market participants believe that the Reserve Bank of India (RBI) would be able able to maintain the exchange rate in a steady band. “After the volatility experienced during July-August 2013, till date, the currency has been marginally volatile. But it has been kept under control,” said K. N. Dey, Senior Advisor, Mecklai Financial. However, in this period, the RBI has been able to increase its foreign exchange reserves from $ 285 billion to $ 320 billion.
The rupee touched a record low on August 28, 2013, at 68.85 a dollar. Currently, at the fag-end of 2014, the rupee is hovering in a wide band of 63 to 64. “Indian rupee has shown significant amount of resilience as compared to its other Asian peers, and has depreciated marginally by around three per cent against the dollar in the year 2014,” said Sugandha Sachdeva, AVP & Incharge – Metals, Energy & Currency Research, Religare Securities.
In the last few months, even though the Dollar Index moved up from 81 to 90, which is approximately 10 per cent, the rupee depreciated only by 3 to 4 per cent. Going forward, said Mr. Dey, “We expect the rupee to move in a similar band with a slightly depreciating mode to adjust with the international markets.”
Many factors have been ascribed for a steady level of rupee. The softening oil prices from $115 per barrel to below $60 as well as the fall in commodity prices have held the rupee to a great extent from depreciating. When compared to other emerging market currencies, the rupee has not fallen much, “mainly due to a strong and positive Government with higher GDP expectation and the opening up of various sectors for foreign direct investments (FDIs),” said Mr. Dey.
“The rupee’s out-performance against its peers has largely been on the back of reform optimism and improving macro-economic fundamentals,” said Ms. Sachdeva.
However, she said that the predominant factor governing the currency landscape would be the broad-based strength in dollar against all major currencies that might lead to some depreciation of the domestic unit.
The expected monetary tightening by the U.S. Federal Reserve and the beginning of the rate cut cycle in India would be key factors driving the direction of rupee.
On the debt side, as long as the returns in India is higher than in the U.S., “we would see more money coming into debt segment ,” said Mr. Dey, adding, “there could be some outflows if the U.S. raises its interest rates very quickly or India cuts its rates.”
The forward premium is also likely to come down in the second-half of 2015 on account of reducing gap between the U.S. and Indian interest rates.
The 5-year MIFOR can come down from 6.40 to 5.75 per cent during Q2.
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