Rupee likely to test lower levels in medium term

By Joydeep Sengupta, Managing director, Global Markets Group, Bank of America

The rupee has appreciated from 47.10 by more than 5% in September to 44.50. The initial trigger was ascribed to RBI hiking rates more than market expectations and the rupee relatively “correcting” vis-a-vis other Asian currencies.

Global players seem to be positioning for a second quantitative easing package (QE2) in the US and favour selling the dollar against Asian currencies like the Korean won and the Indian rupee. These currencies have not appreciated from January 2010 as much as other Asian currencies like the Malaysian ringgit, the Philippine peso and the Indonesian rupiah. The recent strength in the rupee seems to be trader-driven in anticipation of large PSU IPO forex inflow.

Market estimates that this incremental Fx flows would have to be brought into the country mid-October and then leave the country early November. Currently, most savvy market participants have built short dollar positions ahead of this flow. Much of this already has happened, and closer to the actual flow, we may see profit taking on these positions, and traders going long on dollar ahead of the outward remittance leg. My sense is that, RBI may step in to prevent an otherwise unusually volatile month of trading.

It makes sense in the very short term going long on dollar around the current levels of 44.50 with a take-profit target of 45.50. Exporters, who have largely not participated in this September move, may look at 45.50 levels to increase their hedges as the rupee may eventually test lower levels (i.e. appreciate) in the medium term.