[ET 24TH MAY]
Let's have a look at the five major reasons behind the rupee's weakness:
Dollar On A Horse Ride
The main reason causing the rupee to fall is the immense strength of
the Dollar Index, which has touched its three-year high level of 84.30.
The record setting performance of US equities and the improvement in the
labor market has made Americans more optimistic about the outlook for
the US economy, thereby spurring greater hopes of QE tapering.
The US dollar is looking like gold these days because the Federal
Reserve is in a very different position versus the ECB, BoJ and the RBA.
The Federal Reserve is talking about tapering asset purchases at a time
when European officials are considering more aggressive monetary easing
measures such as negative deposit rates.
The fact that the Euro
zone is in a recession is just another reason why investors are snapping
up dollars. The monetary policies of the ECB and the BoJ pose a threat
to the value of the EUR and JPY whereas the next move by the Fed should
support the dollar. This divergence is bringing the dollar more into the
limelight as a 'safe haven'. Capital preservation is just as important
as capital appreciation in the present times and for this reason the
direction of the monetary policy and the consequent implications for the
currency has become very important.
Recession in the Euro Zone Is Back On the Table
The rupee is also feeling the pinch of the recession in the Euro zone.
The euro, which was seen holding the key level of 1.30, has dropped
lower to 1.28 levels on the back of deterioration in the local economic
data. For the past month, investors have been selling Euros and buying
dollars on the premise that the Euro zone is in a recession; and the ECB
is considering more stimulus at a time when the Fed is considering
less. If the data shows a deeper contraction in Europe and Mr. Draghi
reminds investors that the Central bank is watching the economic data
carefully to see if additional action is necessary, the EUR/USD could
extend its losses.
Owing to the uncertainty prevailing in Europe
and the slump in the international markets, investors prefer to stay
away from risky investments. The credit rating agency's downgrade of
India to BBB- with a negative outlook — the last of the investment
grade — has not helped its cause. Any outward flow of currency or a
decrease in investments will put a downward pressure on the rupee
exchange rate. This global uncertainty has adversely impacted the
domestic factors and could lead to a further depreciation of the rupee.
Bleak Fundamental Outlook
The country with high exports will be happier with a depreciating
currency; the same does not apply for India. India, on the other hand,
does not enjoy this luxury, mainly because of increasing demand for oil,
which constitutes a major portion of its import basket. The fall of the
oil price to US$90/barrel has helped India to fight the depreciating
rupee up to some extent but at the same time the Euro zone, one of
India's major trading partners is under a severe economic crisis. This
has significantly impacted Indian exports because of reduced demand.
Thus India continues to record a current account deficit of around 4.3%,
depleting its Forex reserves in the bargain and thus depreciating the
rupee.
From time to time, the macro-economic policy has to accord greater
emphasis to one segment or the other. At the present time the worry
lines are multiple — high consumer price inflation, a large fiscal
deficit, poor growth, flat industrial production and a balance of
payments current account deficit.
No Balance at Balance Of Payments
The Government of India was relaxed with respect to the CAD issue as
there was a sharp fall in the commodity prices (of gold and crude oil). A
large part of the import bill is driven by other resources as well. The
facts show that fertilizer imports surged by 30% in the last two years
and coal imports have doubled. Therefore, the problem of CAD continues
to persist.
The Indian economy needs to debug its structural reforms and the gap between the imports and exports.
With the reduction in exports and an increase in imports, on one side
the current account deficit has increased while on the other, the fiscal
deficit is also expected to be above the comfort levels due to
increased subsidy. A slowdown in the global economy has adversely
reduced the demand for Indian goods. The falling commodity prices on the
other hand have increased imports resulting in an imbalance between
payments and receipts.
Technically Speaking
We note a recent interesting inverse 'Head & Shoulder' pattern on
the USDINR chart where the prices are close to the neckline of 55.40 and
were seen facing resistance. In case this pattern holds true and the
prices break above 55.40 on a consistent note (say for two weeks), then
we might see a wild move in the Indian rupee going forward and we can
easily target 57-58 levels. Even psychologically, the levels of 55 are
seen as important. The breakout above these levels has triggered stop
losses making the investors cover their long positions resulting in
further increasing the demand for the dollar.
