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Informist, Thursday, Aug 1, 2024

 

By Pratiksha

 

NEW DELHI – After depreciating 0.4% last month, the rupee is expected to settle broadly unchanged from its current levels at the end of August as the impact of weakness in the Chinese yuan may be countered by the Reserve Bank of India's active intervention through dollar sales. 

 

The Indian unit is likely to end the current month at 83.69 a dollar, as against 83.72 a dollar at the end of July, according to the median of estimates of 18 respondents, including banks, corporates, and brokerage firms, polled by Informist. By the end of September, the Indian currency is likely to settle at 83.70 per dollar, a median of estimates by 18 respondents showed.

 

However, considering the RBI allowed depreciation in the Indian currency last month, letting it test successive record lows, poll respondents expect the depreciation-bias for the rupee to stay intact in August as well. Out of the 18 poll respondents, 11 expect the rupee to hit a fresh record low in August. However, only three respondents expect the Indian currency to hit the psychologically-crucial 84-per-dollar level. The rupee hit a lifetime low of 83.75 a dollar today. 

 

"There is so much negativity building around China and its economy, but the central bank's grip on our currency is so much that the rupee is not really tracking yuan directly. Even if there is any effect, it is with a lag," a treasury official at a large engineering company said. 

 

The offshore Chinese yuan weakened sharply last month and was highly volatile after the People's Bank of China unexpectedly cut its benchmark prime lending rate and short-term rate. The one-year and five-year loan prime rates and seven-day reverse repo rate were reduced by 10 basis points each. Market participants expect weakness in the Chinese yuan to persist going ahead, as recent economic data continues to point towards a struggling economy.    

 

Market players said looking at last month's movement in the rupee, it seems like the RBI has become more tolerant of a weaker exchange rate. The central bank may continue to allow some depreciation in the local unit due to the rupee being overvalued in comparison to its trading partners, they said. The rupee's real effective exchange rate against a basket of 40 currencies, in terms of trade-based weights, rose to 106.54 in June, its highest level since December 2017. A rise in a currency's REER is an indication that the country's exports are becoming expensive, and it is losing trade competitiveness.

 

"RBI is absorbing the inflows and not allowing any appreciation but has been slowly taking the pair (dollar/rupee) up by selling on the upside. RBI may probably be looking at the REER which in June was at 106.54. It would like to bring it (REER) down slowly to 104," Anil Kumar Bhansali, head of treasury and executive director, Finrex Treasury Advisors LLP.

 

Poll respondents also flagged that the government's decision earlier last month to reduce customs duties on gold to 6% from 15% has increased dollar demand from gold importers, which will also keep the Indian unit under pressure. 

 

Apart from the central bank's actions, weakness in the dollar index may also cushion the Indian unit, respondents said. The dollar index, which measures the strength of the greenback against a basket of six major currencies, fell over 1.7% last month.

 

Market participants expect the dollar index to weaken further in the coming months, as Federal Reserve Chairman Jerome Powell's comments on Wednesday have cemented expectations of a rate cut in the US in September. Powell said that interest rates could be cut as soon as September if the US economy follows its expected path. Fed funds futures traders see a 100% chance of a rate cut at the Fed's September meeting, according to CME FedWatch tool. 

 

While foreign portfolio investors' appetite for domestic equities had soured after the Union Budget for 2024-25 (Apr-Mar) proposed raising the long-term capital gains tax on all financial and non-financial assets, market players expect foreign portfolio investment inflows to make a return as hopes of a rate cut in the US in September strengthen. 

 

A steady stream of foreign fund inflows on the back of Indian government bonds' inclusion in the JP Morgan Government Bond Index – Emerging Markets suite, which took place on Jun 28, may also keep the Indian currency supported, they said. Since the bond index inclusion, foreign portfolio investors have bought $2 bln worth of gilts under the fully accessible route, which are index-eligible. 

 

However, the central bank will actively absorb most of the inflows to contain the volatility in the exchange rate and thus, keep the Indian unit in a tight band, poll respondents said.

 

"The RBI is cautious about the rupee appreciating too quickly, as this could hinder exports. With reserves at an all-time high, it appears the RBI will continue to maintain a tight range for the rupee moving forward," Amit Pabari, managing director, CR Forex, said.

 

While crude oil prices have fallen almost 5% last month, currency traders will remain watchful of any sharp movement in the commodity, given the looming geopolitical uncertainties. As India is the third-largest oil importer in the world, a rise in prices of the commodity weighs heavily on the Indian rupee.

 

The rupee may have a lot of factors going for it, but one thing is for sure, the RBI will continue to be the dominant player, like it has been since last year.

 

POLL DETAILS

 

Participants	Aug-end	Sep-end
CR Forex	83.85	83.30-84.00
DCB Bank	83.42	-
Emkay Global Financial Services	83.70	-
Finrex Treasury Advisors LLP	83.80	84.00
Globe Capital Market	83.35-84.00	83.20-84.20
HDFC Bank	83.60-83.80	83.50-84.00
HDFC Securities	83.50-83.95	83.45-84.00
IBM India	83.80-83.85	83.50-83.60
ICBC Bank	-	83.40-83.50
ICICI Bank	83.60	83.50
IDFC FIRST Bank	83.50-83.84	83.50-84.00
Karur Vysya Bank	83.78	83.85
Large engineering Co	83.50	83.60
Large state-owned oil co	83.65	83.72
LKP Securities	83.85-83.95	83.00-83.25
Mecklai Financial Services	83.55	83.40-83.50
Mid-sized brokerage firm	83.50-84.00	83.50-84.25
Shinhan Bank India	83.10-84.20	82.70-84.00
Standard Chartered	-	83.70
UCO Bank	83.68	83.70
Median	83.69	83.70

 

End

US$1 = 83.72 rupees

 

With inputs from Sourabh Kumar and Kabir Sharma

 

Edited by Tanima Banerjee

 

 

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