Informist, Wednesday, Nov. 13, 2024

By Gowri Lakshmi

MUMBAI – The rupee will likely breach the key level of 84.50 a dollar in December as foreign portfolio investors may continue to sell Indian shares due to the lure of China's new economic stimulus plan and uncertainty about US foreign policy after Donald Trump's victory, foreign exchange dealers said. Dealers expect foreign investment outflows to continue till December with net inflows expected only in the new calendar year.

Foreign investors net sold Indian equities worth $10.9 billion in October, which was why outflows were strong that month. Though most dealers are reluctant to estimate net outflows for November and December, the estimates range from $5 billion each in November and December to $8-10 billion in November and then taper off in December – foreign investors have net sold Indian equities worth $2.3 billion so far in November. This is expected to pull the rupee down, with the Indian currency breaching 84.60 to a dollar in the worst case.

This month, the rupee has fallen to new lows in almost every session. The Indian unit touched a new lifetime low of 84.4100 a dollar on Tuesday. The rupee broke through 84.00 to the dollar in early October, a level the Reserve Bank of India had strongly protected through aggressive dollar sales for months. However, the record sales of shares by foreign investors in October and the dollar-euphoria following Trump's election proved a bit too much and the rupee has stayed below this level after breaching it, dealers said.

Foreign investors have been net sellers of Indian shares since the US Federal Reserve lowered its benchmark rates by 50 basis points in September. In October, the escalating tensions in West Asia and the announcement of the Chinese economic stimulus package provided more reasons for investors to withdraw investments from India and re-allocate elsewhere.

"The situation of investors selling from emerging markets and taking it back to their home country has not happened. They have been reallocating their funds into other emerging countries, largely in China and Indonesia," Alok Singh, Group Head of Treasury at CSB Bank said.

Currently, foreign portfolio investors hold $841 billion worth of Indian shares, according to data from the National Securities Depository Ltd. Overseas investors net sold Indian securities worth $11.12 billion in October, the most in a month since March 2020, when the COVID-19 pandemic hit India.

Though the market may experience another round of large outflows, market participants are not too worried about the movement in the dollar/rupee pair. The latest economic stimulus plan announced by China has received a lukewarm response from investors who want more clarity on the plan. The latest economic package focuses on economic stabilisation rather than stimulation, the Financial Times reported, citing analysts at Nomura.

"The kind of growth that India offers is like no other country in Asia," Singh said, suggesting that investors may again look at India to invest in three to four months. Further, with Trump set to assume the Oval Office on Jan. 20, India can look forward to a stronger political and economic relationship with the US.

"The geopolitical wars, the Trump administration and his tariff policies will keep the EM (emerging market) currencies under pressure in the near term, potentially disrupting the global supply chain," a dealer at a brokerage firm said. "But given the political relations we (India) have with the US, and the increasing anti-China sentiments, (this) may turn beneficial for us," he said.

The RBI has been managing the currency volatility emerging from domestic and global factors smoothly, market participants said, thanks to the huge foreign exchange reserves it holds. The central bank has largely been protecting the currency from sudden shocks, letting it weaken only at a gradual pace. The RBI is expected to continue its interventions in the offshore non-deliverable forwards and the domestic spot markets to prevent the local currency from falling sharply. A strong support level for the rupee is seen at 84.75 per dollar, while 84.50 per dollar, once breached, is expected to be the key resistance.

While the spot rate for the rupee is seen depreciating in the near term and breaching 84.50 a dollar by the end of the year, the forward premium on the one-year dollar/rupee forward contract is also expected to decline in the near term, dealers said.

With Trump in office, the US economy may see inflation climbing higher, the dollar strengthening and benchmark yields rising. After the US election results, premiums on dollar/rupee forward contracts fell sharply across tenures as market participants mulled the possible risk aversion of investors ahead of a second Trump administration.

"The forwards market has been on the receiving end for the last two to three weeks. It's very evident that with geopolitical risks and the RBI still not clear about (interest rate) cuts yet, chances of forwards getting received are more in near months like one month and three months, it would continue till December end," a dealer at a foreign bank said. The premium on the one-year dollar/rupee forward fell to a near two-month low of 2.09% on Monday.

A day before the US election outcome, the spot rupee was at 84.11 a dollar, while the one-year dollar/rupee forward premium was at 193.96 paise. As of Tuesday, the spot rupee was at 84.39 a dollar and the one-year dollar/rupee forward premium was at 177.08 paise. This means that the one-year forward dollar/rupee rate, which was at 86.05 before the US elections, is now around 86.16 post the outcome.

The sharp equity sell-off has also led to a shortage of dollars in the system, leading to a fall in premiums. Considering the outflows are expected to continue till December, market participants expect the forward premiums to remain under pressure in the near term. More sanctions on Russia and Iran could trigger a supply chain disruption, globally, dealers said. Further, amongst several policies intended to boost the world's largest economy, Trump has reiterated he will impose a 10% tariff on all imports and a 60% tariff on imports from China.

Trump's proposed policies, which are seen as inflationary and may potentially put the interest rate cut by the US Federal Reserve on a slower and shallower path, may further weigh on the premiums, they said. Market participants see the one-year forward premium falling to 2.00-1.90% in the near term.

However, a section of the traders are cautious before placing big bets on six-month and 12-month forward contracts, as they are waiting for the market sentiment to settle after the US elections and ahead of the December policy decisions by the US Federal Reserve and the RBI's Monetary Policy Committee. "Let's see if Trump will 'walk the talk' after he assumes office. Emerging markets may remain under pressure until then," a dealer at a brokerage firm said. End

US$1 = INR 84.3775

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

Edited by Saji George Titus

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