NEW DELHI: Indian currency traders have been a harried bunch over the last couple of weeks as a confluence of factors have forced the domestic currency to plumb new lows against the US dollar.
Two themes that have had a major impact for most of 2022 are by now quite familiar to traders – an aggressive pace of interest rate hikes by the US Federal Reserve and the persistence of high commodity prices following Russia’s invasion of Ukraine.
Both of these two events have taken their toll on the rupee as higher rates in the world’s largest economy has prompted foreign players to pull out vast amounts of money from Indian equities and as elevated crude oil prices have worsened the outlook on the domestic current account.
The rupee touched a fresh record intraday low of 77.69/$1 in early trade Tuesday. So far in 2022, the domestic currency has weakened 4 per cent against the US dollar.
During phases of risk-aversion, investors prefer the safety of the US dollar, leading to weakness in emerging market currencies such as the rupee. So far in 2022, the US dollar index has risen more than 8 per cent, touching 20-year highs.
When one adds in worsening economic parameters in India, the outlook on the rupee worsens further.
India’s headline retail inflation surged to an 8-year high of 7.79% in April, while wholesale price inflation zoomed to a record high 15 per cent.
Meanwhile, a slew of organisations including the IMF and the UN have reduced India’s GDP growth forecasts.
“Disappointing Chinese economic data, further clarity on US Federal reserve & ECB rate hikes, rising crude oil prices and a correction in the domestic equity markets have led to the rupee depreciation. Moreover, the cut in India’s GDP projection amid soaring domestic inflation has also added to Rupee woes,” Emkay Global Financial Services said.
HEADED TO 78/$1 SOON?
Standard Chartered Bank’s Head of Economic Research, South Asia, Anubhuti Sahay told ETMarkets that the rupee’s near-term course would be charted by global risk appetite, which in turn depends on Chinese developments and the pace of US Fed rate hikes.
The Fed has already hiked rates by 75 basis points so far in 2022 and given the fact that US inflation remains sharply above targets, the central bank is seen carrying out several more rounds of 50-basis-point hikes.
“In the near-term, we do expect the rupee to keep a weakening bias. Our June-end forecast on the rupee is around 78/$1 because we do expect dollar to remain on a stronger footing, given the current risk-averse environment and the probability of faster rate hikes from the Fed,” Sahay said.
Motilal Oswal’s Forex and Bullion Analyst Gaurang Somaiya sees the rupee in a range of 77.40-78.20/$1.
While the RBI is seen continuing to use its formidable arsenal of foreign exchange reserves – currently just shy of $600 billion – to prevent excessive volatility in the rupee, analysts believe that the central bank may permit the local currency to depreciate in an orderly fashion, given the macro-economic situation.
“Overall, we expect that RBI will allow a steady slip in the currency and we expect the pair to trade in the wide range of 76.50-78.50 in the short to medium term,” CR Forex Advisors MD Amit Pabari said.
According to Finrex Treasury Advisors Head of Treasury Anil Kumar Bhansali, as the rupee weakens, importers should “buy all the dips”, or episodes when the rupee notches up some gains due to dollar sales by the RBI or any other reason.
“Any dips to 77.30/77.00 needs to be bought as oil prices keep moving upwards and dollar index remains on a 20 year high near to 105. They can use the option route by buying out of the money calls at 78.00 and funding it by selling puts at 77.25,” Bhansali said.
A weakening rupee makes imports more expensive while giving exports a boost by making them cheaper.
The trading head recommends exporters keep a stop-loss of 77.50/$1 in case the rupee were to strengthen and hold onto their dollars for higher dollar/rupee levels which could come in the next few days.
“Or they can buy out of the money put at 77.50/77.25 and keep holding to the position. If the rupee gains the put will give them profit else they will be able to encase on the upside,” Bhansali said.
SECTOR BREAK-UP
CR Forex Advisors was of the view that exporters with thin margins, such as those in the agricultural or chemicals business should cover 90 per cent of exposure in the range of 77.50-77.90/$1.
For exporters with thick margins such as those in the textiles, engineering or pharmaceuticals business, CR Forex Advisors recommended waiting for higher dollar/rupee levels (a weaker rupee) to receive best results.
The firm suggested that such exporters maintain a 40-50 per cent hedge ratio, which should at the moment represent 50-53 per cent of orders.
“Importers were advised to cover 76.95 as the pair was expected to move higher towards 77.80. The RBI intervention near 77.30-77.40 had given them a chance to cover. Those who have not covered are suggested to utilise any dip near 77.30-77.50 to cover the next 20 days' import.”
Source Name:- Economic Times