Rout to relief: will the rupee rock?

MUMBAI: The rupee no more faces any fear of rout now unlike the period more than two years ago when overseas investors had pressed the panic button with their shrinking investment portfolios.

With the economy beginning to look up, the local unit is well placed to face any global disruption, be it a US rate hike or Brexit , triggering fund outflows from emerging markets.

In the morning trade on Thursday the rupee is little changed at 67.33 a dollar.

The rupee on Wednesday closed at 67.34 against 58.51 a dollar on May 23, 2014. It had hit all time low at 68.85 in August, 2013.

“Going forward, if both interest rates and inflation remain low, the rate differential between India and US will come down with an expected US rate hike,” said Ashish Vaidya, head of trading and asset liability management (ALM) at DBS Bank.

“This suggests rupee depreciation would follow a different glide path than what was seen in the past. The pace of fall will be slower.”

In the two years to May 2016, the rupee has lost about 15% to the greenback, but the value erosion did not trigger any panic as the local currency was far from volatile.

Analysts and traders mostly see the rupee in a 68.50-69.50 range by the year-end.

Among major currencies, the rupee was the third best performing during the two-year period as overseas investors earned a total return of 1.88%, data from Bloomberg showed.

Between 2012 and 2014under the UPA government, the rupee ranked ninth yielding 13.35% total returns.

It has mostly beaten its emerging market peers along with other major currencies including the US dollar and Euro. Argentine Peso returned the most at 36.3% but it was one of the worst performing economies, struggling to contain outflows.

Total investment returns include spot exchange rate and interest income.

“In the past two years or so, Indian Rupee has seen an orderly depreciation against the dollar with no abrupt moves,” said Bhaskar Panda, Senior VP, Treasury, HDFC Bank. “Planning a hedging for exchange risk for investors and corporates, has therefore become a lot more predictable.”

Going forward, three factors are likely to influence the exchange rate. A rate hike in U.S. which may lead to overseas fund outlflows, higher crude prices creating dollar demand and BREXIT concerns in Europe.

“While these global issues may affect the USD-INR exchange rate, yet expectations of growth differential may act in favour of investment into India. As a result, INR may remain better off in comparison to other emerging market currencies,” said Panda.