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Informist, Tuesday, Sep 3, 2024

 

By Sourabh Kumar

 

MUMBAI – After depreciating 0.2% against the dollar last month, the rupee is expected to end this month broadly unchanged from its current levels, as the Reserve Bank of India's active dollar purchase interventions may offset the positive impact of a weak dollar. 

 

According to the median of the forecasts of 17 respondents from banks, corporates, and brokerage houses polled by Informist, the rupee is likely to end this month at 83.90 a dollar, compared to 83.86 at the end of August. Out of the 17 respondents in the poll, seven expect the Indian unit to rise above the key technical resistance of 83.80 a dollar in September. On the other hand, only five see the rupee falling below the psychologically-crucial level of 84 per dollar this month, indicating that the Indian unit will continue to trade in a tight range.

 

With the US Federal Reserve widely expected to cut interest rates from this month, market participants expect the dollar to weaken sustainably going ahead. The dollar index, which measures the strength of the greenback against a basket of six major currencies, declined 2.2% last month. 

 

"The dollar weakness will come in," said Alok Singh, group head – treasury at CSB Bank. "That is a process, it won't stop. The dollar index is likely to go back to 90 levels."

 

While there is certainty about a rate cut in the US this month, the debate is now centred on whether it will be a 50-basis-point cut or one of 25 bps. Currently, the odds of the US central bank cutting interest rates by 50 basis points at its policy meeting this month are 31.0%, while the odds for a 25-bps rate cut are 69.0%, as per the CME FedWatch Tool.

 

"Even in the case of a large rate cut by the Fed, I am seeing the rupee's rise to be capped at 83.60 a dollar," said Sajal Gupta, senior vice-president and head of forex and rates at Edelweiss Financial Services Ltd. 

 

While some market participants see the rupee rising after the Fed cut rates, they expect the joy for the Indian currency to be limited. The rupee is likely to again embark on its journey of gradual depreciation against the dollar, according to market players.

 

Market participants also expect foreign fund inflows into domestic markets to pick up once the Fed embarks on its policy-easing cycle, which will support the Indian currency. Last month, FPIs net invested $3.04 bln in Indian markets, most of which was in the debt market. 

 

Another source of comfort for the Indian currency will be easing crude oil prices, according to respondents in the poll. Last month, Brent crude oil prices fell almost 5%. As growth in major economies around the globe eases, concerns about demand for crude oil have kept prices relatively low. Softening of the US labour market, an easing Eurozone economy, and a sluggish recovery in the Chinese economy are expected to keep crude oil prices low, market participants say. A drop in crude oil prices decreases India's import bill, which supports the Indian unit.

 

However, even amid all the positivity, the final call on the currency's movement will continue to rest with the apex bank, as it will look to beef up its foreign exchange reserves, according to respondents in the poll. Last month, the central bank stepped in to buy the greenback every time the Indian unit inched closer to 83.75-83.80 a dollar. As on Aug 23, India's foreign exchange reserves were at an all-time high of $681.69 bln, up $7.02 bln on week.

 

"The RBI will limit rupee's gains even if the dollar materially weakens and will likely keep it stable at least till domestic inflation is above target. A cheaper rupee NEER will be preferred for competitiveness," said Dhiraj Nim, forex strategist, ANZ Banking Group. 

 

Apart from building reserves, some market participants think the central bank will continue to absorb dollars due to the rupee being overvalued compared to its trading partners. The rupee's real effective exchange rate against a basket of 40 currencies, in terms of trade-based weights, rose to 107.33 in July, the highest since December 2017. 

 

However, just like last month, market players expect the RBI to intervene through dollar sales as well, in case the rupee inches close to the crucial level of 84 per dollar, or depreciates sharply. 

 

"As per the RBI's REER rate, we are at around 107, so the rupee is overvalued by 7%," Ritesh Bhansali, vice-president, Mecklai Financial Services, said. "In other words, the rupee should depreciate by at least 2-3% so that we come in the 104-105 range, but that is from a theoretical perspective. Flows and the sentiments matter more than the REER, from a medium-term perspective."

 

Some market players are of the view that the RBI may eventually let the Indian unit fall below 84 per dollar this month, in case there is renewed strength in the dollar or a surge in crude oil prices. 

 

Whatever the case, what is certain is that even with so much changing globally, the rupee will continue to be dictated by the domestic regulator's game plan.

 

POLL DETAILS

 

Participant	September-end	December-end
ANZ Banking Group	84.00
Bank of Baroda	83.80-83.90	83.85-83.90
CSB Bank	83.85	84.10
DBS Bank	83.50-84.50	83.00
Edelweiss Securites	83.95	84.20
Finrex Treasury Advisors LLP	84.05
HDFC Bank	83.90-84.00	84.00-84.20
HDFC Securities	83.70-84.10	83.60-84.50
IBM India	84.00
ICBC Bank	83.50
ICICI Bank	83.70-84.10	83.70-84.10
IDFC FIRST Bank	83.70-83.84	84.00-84.50
Karur Vysya Bank	83.90	83.60
Large brokerage	83.70-84.30
Large Engineering Co	83.50-84.00
Mecklai Financial Services	83.80	83.60
UCO Bank	83.90
Median	83.90	83.98

 

End

 

US$1 = 83.97 rupees

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

With inputs from Pratiksha and Kabir Sharma

Edited by Avishek Dutta

 

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