Rupee sailing through rough waters; may hit 2013 lows in Nov-Dec

NEW DELHI: Like the first two months of 2016, November and December are likely to be highly volatile for the domestic currency market in the runup to and following the US elections.

Rising chances of a Fed rate hike next month and redemption of FCNRs worth $26 billion maturing this month back home are likely to put pressure on the domestic currency.

Opinion polls have indicated a tight race between Republican Donald Trump and Democrat Hillary Clinton in the US presidential election.

Earlier, the rupee witnessed nervousness at the beginning of 2016, as the local currency dipped from the high of 66.18 mark against the US dollar on January 1 to hit a low of 68.78 on February 26.

That time, the rupee slipped in tandem with the domestic equity market, which tumbled over 10 per cent in the first two months of 2016. The currency has been moving in a narrow range since June 2016.

Currency analyst Anindya Banerjee of Kotak Securities believes the rupee will not see any pressure on the domestic front, as the Reserve Bank of India will take all the necessary steps to protect it from any headwind.

“But if Donald Trump comes to power, the US dollar will strengthen and emerging currencies will take a hit and the rupee will not be an exception. I believe, the rupee will trade in the 66-68 range for next 2 months,” he said.

According to Bank of America Merrill Lynch, expectations of a rate cut by the Reserve Bank of India (RBI) in April should support the rupee by attracting foreign portfolio investors (FPI) into local bonds and the rate-sensitive stocks, which could somewhat offset the redemption of $26 billion worth of 2013 FCNR deposits maturing in November.

Besides the US elections this month, an Italian referendum and a possible US Fed rate hike in December coupled with French election next year will further give direction to global currencies.

According to experts, if the outcomes of these major political events are in favour of the economies, then some depreciation can be expected in the Indian rupee, which can hover near the lows of 2013. The rupee had hit an intraday low of 68.85 on August 28, 2013.

Rupa Rege Nitsure, Chief Economist, L&T Financial Services, said: “I believe the rupee will remain highly volatile in November and December on account of major global events. If the US Federal Reserve starts raising interest rates from December, whose chances are very bright, then there could be some debt outflows from India, like from other emerging markets. Luckily, we have a good buffer of foreign exchange reserves and RBI has been managing the currency quite well. So a depreciation of the rupee will be orderly, but the currency will definitely depreciate and we may see its lowest level in December.”