HYDERABAD: It’s been a tumultuous year for the Indian rupee, which fell with intimidating speed towards the end of 2018. Asia’s worst-performing currency lost more than one-tenth of its value, hitting a lifetime low of 74.49 in October when global crude prices turned somewhat insane. Around the same time, a strengthening greenback and foreign fund outflows turned up the heat on the domestic unit, making it a problem child that everyone wants to abandon.
Though rupee found its feet in December, a host of risks — domestic and global — may keep it on the cliff and continue to puzzle market watchers by its indirection in 2019. Per estimates, the local currency will likely hover between 71 and 75 per dollar, subject to certain preconditions. First up is global oil prices, which need to remain within the realm, as any deviation could upset momentum and agonise traders. Crude prices are down by 30 per cent over 2017, lending a helping hand to net oil importing countries like India.
Next in line is the US Federal Reserve’s policy stance of gradual tightening — anticipated three rate hikes in 2019 — which is now being softened. Volatility is also round the corner with reports emerging that US President Donald Trump, whose displeasure with Fed Chairman Jerome Powell is well known, could go after Powell’s head.
Even if such an episode is avoided for greater good, it’s unlikely that all will be well for rupee. Provided Fed continues with its normal rate tightening course, US bond yields will strengthen, which will have a bearing on our currency.
And if economic growth picks up steam, which is most likely, foreign portfolio outflows, which are already basking in the luxuriant glow of Dow Jones, will go miles away from emerging markets like India. In 2018, foreign investors pulled out a whopping $12 billion from local stocks and bonds.
Lastly, the ongoing US-China trade war, Brexit outcome could add to uncertainty. “Any risk re-assessment would imply global investors shying away from risky EM assets or would prefer cherry-picking at appropriate premium. INR will not be insulated from any of the global idiosyncrasies and will follow EMFX suit,” noted Sajal Gupta, Head Forex & Rates, Edelweiss Securities Ltd.
Back home, the upcoming general elections are a key risk to rupee, according to Nomura Securities. Markets expect a return of the incumbent government, though with reduced majority. That sentiment could go sour, if results throw up a fragile coalition, putting rupee under pressure. “Separately, INR volatility could emerge ahead of the election-led event risk if opinion polls start hinting at a mixed mandate, and with investors wary on taking heavy INR assets’ positioning ahead of the union elections,” Edelweiss noted.
According to Fitch, inflation will edge up mildly as food prices normalise and higher import prices stemming from rupee depreciation, while banks’ inability to lend, the ongoing NBFC and liquidity crisis too could play a part on rupee’s performance. Weakening rupee would be credit negative for Indian companies, particularly those that generate revenue in rupees but rely on US dollar debt, noted Moody’s.
Uncharacteristic, but a weakening rupee became a political issue, with opposition parties calling for a nationwide strike just a few months ago. The eroding exchange rate also peevedpolicymakerss, prompting them into a humble public submission that none will come to its rescue, except market forces. “There’s no target or band around any particular level of exchange rate, which is determined by market forces demand and supply,” said former RBI Governor Urjit Patel in October.