Sturdy rupee may wilt less in a US Fed rate hike storm

MUMBAI: The rupee has weathered storms better than most other emerging market currencies in the last two years, and with the economy beginning to look up, is relatively well placed in the event of a US rate hike strengthening the dollar.

“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. 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.

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.