Rupee to be under stress amid US rate hike , political risks

Mumbai: Heightened chances of a US rate hike, along with a slower pace of reforms and soon to be released domestic macro-economic inflation data, are expected to keep the Indian rupee under pressure during the upcoming week.

"Over the near term, we expect the Indian rupee to reach its near term peak between 66.90/67.20 levels on spot against the US dollar," Anindya Banerjee, Associate Vice President for Currency Derivatives with Kotak Securities, told IANS.

"Post the US Fed, Indian rupee may gradually depreciate towards 68 levels on spot."

The US Federal Reserve FOMC`s (Federal Open Market Committee) rate setting meeting is slated to be held on Wednesday. The US Fed is widely expected to announce a 25 basis points (BPS) interest rate hike. 

A hike can potentially lead foreign portfolio investors (FPI) from emerging markets such as India, and dent the business margins of the corporate sector, as access to capital from the US will become more expensive.

However, according to Hiren Sharma, a senior independent analyst, the USD/INR on a technical level has formed a `Bearish Gartley` pattern which suggests a possible rupee comeback.

"We did witness a pull back from 68.85, and with a weekly close of 67.42, there is an immediate support of 67.20/67.08 and resistance at 67.72 and 68.14. Along with other global and emerging currencies, rupee too will move in tandem with the US Fed`s policy," Sharma said.

"Markets are keenly awaiting the US FOMC (Federal Open Market Committee) policy meet. We have seen US dollar resurgence post-Trump rally, with the dollar index now stabilising around 101.20."

As per Sharma, the RBI during its recently held monetary policy review `was vocal in saying` that it has to intervene in the forex markets, especially when rupee weakened more than 68.50 to touch 68.85 levels. 

"Hence, in a way this level seems protected. Even exporters utilised a weaker spot to cover their receivables," Sharma explained.

"Other than the spot decline, due to US Fed`s rate hike intention and supposedly RBI`s rate cut - the forward premiums had fallen drastically."

Banerjee, too, attributed the rupee`s strengthening to the apex bank`s aggressive intervention. 

"Indian rupee has strengthened from 68.15 levels to 67.30 levels on spot, thanks to aggressive intervention from the central bank," said Banerjee. 

"What is remarkable is the fact that over the past four weeks, Indian capital markets have witnessed over $8 billion being sold by FPIs (foreign portfolio investors), nearly $6 billion in debt and rest in the equity segment."

He added: "Inspite of relentless selling from FPIs, Indian rupee has depreciated by just 1.4 per cent against the US dollar and appreciated against most of the EM (emerging markets) currencies and against quite a few currencies in the developed world, like the Euro, JPY (Japanese Yen) and GBP (British Pound)."

On a weekly basis, the rupee appreciated by 78 paise to 67.42 against a US dollar from last week`s close of 68.20.

Another key reason for the rupee`s strength has been attributed to the FII (foreign institutional investors) inflows into the Indian equities markets.

In terms of investments, provisional figures from the stock exchanges showed a healthy inflow of foreign funds worth Rs 936.99 crore. 

Figures from the National Securities Depository (NSDL) disclosed that FPIs were mainly net sellers in the debt market. They sold a total (equities+debt) instruments worth Rs 15,924.28 crore, or $2.34 billion from December 5-9.

"FIIs who have been sellers for the most part in November and December had begun to be net buyers in the last couple of days," Anand James, Chief Market Strategist, Geojit BNP Paribas Financial Services, told IANS.

Besides, other major themes that are expected to impact the rupee`s movement will be the central government`s efforts to end the stalemate on the contours of the Goods and Services Tax (GST) framework and political logjam in Parliament post demonetisation.