Why the Indian rupee might spring a surprise

Global currencies are subject to frequent heaves and tumbles on account of myriad influences ranging from the serious to frivolous.

By Promoth Manghat

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Published: Thu 28 Sep 2017, 11:00 PM

Last updated: Fri 29 Sep 2017, 1:43 AM

There is no one who can claim to be a currency clairvoyant; at least none that I know of.
Global currencies are subject to frequent heaves and tumbles on account of myriad influences ranging from the serious to frivolous. Speculators throw in yet another dimension and even a seasoned forex nerd will only tread cautiously when it comes to forecasting.
Each time, I am asked to share my views on the movement of a particular currency - which in the case of the UAE and wider Gulf is mostly about the Indian rupee (INR) versus the US dollar (USD) - I remind myself that I have no mantle of a diviner, and I better remain on the side of prudence.
For that matter, predicting on any emerging market currency with undiluted conviction, let alone the INR, is not an easy task as these currencies sway with the prevalent global as well as national economic and socio-political vagaries, and the fundamentals may get sidelined.
Each time INR has been on a rise and fall against the US dollar, investors - or remitters in my business environment - are caught in a limbo of anxiety and confusion. So they come to me and my colleagues and peers with the Shakespearean question: To send or not to send?
Well, those who are more concerned are the opportunists who wait for a rate that will give them more rupees to a dollar. For a majority in the Gulf, which is the blue-collar diaspora, the highs and lows of the rates do not matter. They have to remit their hard-earned money homeward anyway for the upkeep of their families. Yet, the windfalls of a rise in the dollar rates translated into more rupees for each dirham they send is a boon well heralded.
If one looks at a four-year trend for the sake of a random assessment of the INR vs USD drama, you would find a psychological perch rate for the dollar each year, which remitters take as some sort of a benchmark in their value calculations for that specific year.
From 2014 to 2017, INR vs USD rates have traversed a wide swathe. In 2014, the rate ranged between +60 to +63, except in March when it fell to +59. In 2015, the range was +66 for most of the year, except July (+63), March and January (+62), and February (+61). The year 2016 was a bumper year for investors, so to say, because the rates were in the range of +66 to +68. In 2017, rates dipped to +64, barring the first two months of the year, January and February, when rates were +66.
So each year, there has been a perceived comfortable range, but a general weakness is to take the highest value of the range as a judgement point.
The current scenario is no different. The Indian rupee has continued its appreciation trail against the USD, starting the year at just above 68. While initially there was a consensus view that INR will touch 70+ levels in the backdrop of demonetisation and GST woes, I think that we are past these concerns. Demonetisation is a thing of the past, GST has rolled out smoothly, inflation remains low, and political stability has never been so conducive for a strong rupee. All these point to a stable currency regime and coupled with robust buildup of forex reserves and portfolio investment flows, there is reason to believe that the INR will continue to stay on the upward trend.
However, a considered view is that INR will not go to the lower realms of 60 because the currency has already appreciated more than five per cent year-to-date and any slip below this is unlikely because of three primary reasons: geopolitical risk, Federal Reserve's balance sheet unwinding, and tensions on the Indo-China border.
A 69.50/70 range, as a Reuters and Edelweiss securities analysis seem to hint, is also an unlikely scenario and with the Reserve Bank of India's USD reserves at an all-time high, the apex bank has all the ammunition to dampen any sudden surge in volatility. It is safe to assume that INR to USD will remain in the range of 63.20 to 66.60. Any movement beyond this point may not happen because of the continuing dovish attitude of the Fed on rate hikes and rub off from the political turmoil of President Trump, both together keeping USD on the slow burner in the short to medium term.
The USD has fallen 8 per cent or so against most of the major currencies globally and any reversal seems unlikely in the near term. On the European front, the Euro has been moving steadily against USD and all emerging market currencies, including INR, have benefited from the general dollar weakness. As a last word to dollar watchers, there could be unknowns on the anvil. Looking at the way the politically driven volatility is playing out, who knows?
The author is the CEO of UAE Exchange Group of Companies, which includes UAE Exchange Centre

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