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1/7/2015 Which way will the rupee go in 2015? Business Today Business News
http://businesstoday.intoday.in/story/indianrupee2015outlookbycareratingsabgroupeconomists/1/213961.html 1/6
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IT CAN DROP BELOW 64
Madan Sabnavis, chief economist, CARERatings
The rupee's slide from an average of 61.70to a dollar in November to 63.51 onDecember 24 has been due to factorsdriven by both internal and globalinfluences, as well as shocks emanatingfrom the Russian crisis. However, themarkets have taken it more stoically thistime compared to 2013 as there is a belief
Home Business Today Focus January 18, 2015 Story
Edition:January 18, 2015
Which way will the rupee goChief economists Madan Sabnavis of CARE Ratings and Ajit Ranade of Aditya Birla Group give anoutlook for the Indian rupee for the year 2015.
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that the balance of payments (BoP) is strong today with forexreserves of around $315 billion and that the presentdevelopment is relatively transient in nature.
The Russian crisis has impacted almost all emergingmarketcurrencies. Russia, being a major oil player, has been affectedrelatively the sharpest by the declining price of oil with theOPEC's recalcitrance to cut production in a bid to squeeze outshale oil production in the US. This, combined with theUkrainian crisis, which has led to a trade embargo by westernnations on Russia, has pushed it to a point of possible default,as memories of 1998 have been ignited when the governmenthad reneged on payments. Add to this the statement by JanetYellen [Federal Reserve chair] on the possible increase in USinterest rates, which has caused funds to move away fromemerging markets. The Mexican peso, Brazilian real, Turkishlira and South African rand were all impacted by thisdevelopment.
The rupee's fall, though not that precipitous relative to peers,has also been driven by developments in the BoP as the tradedeficit has widened in November with gold importscompensating for the decline in the oil bill due to lower crudeprices. This, combined with the outflow of FIIs in both the debtand equity segments, has put pressure on the external balance,thus exacerbating the position. Funds, too, have now bufferedin a rate cut by the RBI in early 2015, which would mean theIndian market would become less attractive at a time when therates are increasing in the US and declining in India. The RBIhas been intervening off and on to control this fall, butsomewhere there is a feeling that the rupee should be allowedto weaken to provide a boost to exports, considering thatshipments have shown signs of slowing down with therelatively anorexic world economy.
The rupee will also tend to be impacted by the global currencyplay where the strengthening of the dollar will continue toweaken related currencies and this is one factor over which wewill have less control. The earlier theory of the real exchangerate being overvalued has diminished in importance given thedecline in inflation in recent times back home.
What does it all means for us? The rupee will remainvolatile until the Russian crisis eases and the direction will beupward (depreciation). Importers should be wary of suchmovements and hedge their positions to ensure they are notcaught on the wrong foot. The RBI, which has almost takencomfort at the inflation situation, will have to bring in theexchange rate factor on top of consumer price inflationtargeting when considering the next monetary policy move. Itshould always be ready to intervene in case volatility increases.
A weaker rupee may not quite help to push up exports, given
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the state of the world economy and the limited elasticity of ourexports to rate changes. Imports, on the other hand, wouldbecome dearer and add to the inflationary pressure. Moreimportantly, companies that have borrowed progressively fromthe ECB route will be pressurised on their repayments and debtservice with a weaker rupee, more so as they have not beenhedging their positions given the high cost. Therefore, a volatilerupee is a concern for the economy and the RBI is cognizant ofthe same.
While a rate of Rs 61 to Rs 62 looks fair under normalcircumstances, Rs 63 to Rs 64 can be the shortterm range,which can spill past Rs 64 if the crisis exacerbates.
The author is Chief Economist, CARE Ratings
OUTLOOK FOR 2015 IS BULLISH
Ajit Ranade, chief economist, AdityaBirla Group
Back in June 2013 the rupee was in freefall. Ostensibly, this was the fate of allemergingmarket currencies, fromIndonesia to Turkey, Brazil and SouthAfrica. The global currency crash wastriggered by a casual comment by BenBernanke, the then chairman of the USFederal Reserve. He merely said thatmaybe the time had come to stop printing
money indiscriminately, the socalled "taper talk". By midsummer, there was near panic in India, the exchange rate wasfalling headlong toward 70, with no bottom in sight. The RBIhiked interest rates steeply, and the finance ministry hikedimport duties steeply.
Come September [2013], a new RBI governor [RaghuramRajan] stepped in, and the turbulent waters receded, as if bymagic. He aggressively pursued foreign investors, includingNRI depositors, by offering a substantially discountedinsurance on rupee depreciation. You bring in dollars withminimum residence requirement, and you get the doublebenefit of higher interest earnings, as well as some protectionagainst depreciation. Your dollars are safe here, was themessage. The exchange rate stabilised, and stayed that way for14 months. Of course, it helped that, alarmed at the devastationcaused by the "taper talk", the Fed, too, went slow on actuallyturning the tap off.
During 2014, the rupee was the top performing emergingmarket currency. It depreciated the least against the dollar.Even the mighty euro and the Japanese yen plunged sharply.
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India also garnered more than $35 billion as a result of the RBIgovernor's bargain to lure dollars. There was record inflow intostock and debt markets. The RBI continued to mop up allincoming dollars, preventing the rupee from appreciating. Theexchange rate stayed within a narrow band of about 60 to 62.This had a perverse effect on importers, who were lulled by theremarkable "stability" of the rupeedollar rate. Importers, whohad future obligations to pay for their imports, chose to remainunhedged. Normally in volatile times, they would have bought"forward" dollars, and covered their future payables. Thisinsulates them from a fall in the rupee. This is not safe, in theworld of currency matters. But importers say that "buying"insurance, i.e., the forward premium to be paid, is too high. Itis implicitly forecasting that the rupee will fall to 67 or 68 inone year's time, when they "know" that it will be much morestable.
The outlook for 2015 remains mostly bullish for the rupee,relative to other currencies. The year will be a theme of dollarstrength. The global dollar index is close to 90, at a multiyearhigh. The steep fall in oil prices has coincided with the shale oilrevolution, and a manufacturing resurgence in the US, whichrecorded its highest quarterly growth in the past 11 years. TheUS and India are the only two economies that, the IMF says,will perform better in 2015. India is reaping a triple bonus fromthe steep fall in oil prices. First, the fiscal deficit will be lowerby, perhaps, Rs 50,000 crore, thanks to savings in oil relatedsubsidies. Second, the current account deficit will be down to1.5 per cent of GDP, thanks to a lower oil import bill. And third,inflation is likely to be lower, making it possible for the RBI toreduce interest rates. This, in turn, is a big plus for the housingand automobile industry.
Oil prices hitting a lower barrier is making shale oil investorsnervous and is causing havoc in the Russian economy. Thelatter has geopolitical implications. So, the oil price fall will becurtailed. The rupee, too, could slip a tad lower, in line withIndia's inflation differential with the dollar economy. GivenIndia's higher growth prospects, a conducive policy and budgetfor private and foreign investments, expect the rupee to be ahigh performer in 2015, too. Best wishes for a rupee anxietyfree New Year!
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