Rupee in real danger of breaching sub-Rs20-exchange rate against UAE dirham in 2016
The beleaguered Indian rupee traded at Rs18.49 against the UAE dirham at about 9.45pm last Friday, not too far from the lifetime low of Rs18.55 vs Dh1 (end-of-day) that it made more than two years ago.
In US dollar terms, the rupee fell down to Rs67.91 vs $1 this Friday, and analysts maintain that it’s only a matter of time before the Indian currency plunges below the 68-mark against the US dollar.
Ideed, on September 3, 2013, the rupee made an intra-day low of 68.845 per dollar, or Rs18.74 against the UAE dirham. A quick look at the 'live' Indian rupee options on the NSE and Dubai Gold and Currency Exchange on Monday (January 18, 2016) suggests that a section of punters believe the rupee is set to breach that lifetime low within the first quarter of this year.
When that happens, however, it won’t be the end of the rupee’s woes, with even further depreciation likely in the short term.
According to some reports, the rupee is in danger of breaching the Rs74-mark against the US dollar this year, translating into a sub-Rs20-exchange rate against the UAE dirham.
That figure may seem surreal to a section of Indian expats who, until the previous global financial crisis, were used to remitting money at half that rate.
For the record, on November 5, 2007, the Indian rupee traded at Rs10.65 against the UAE dirham (Rs39.11 vs $1) on the international market.
Fast forward to today, and the rupee has lost more than 73 per cent of its value in nine years and a couple of months, and is likely to slip further within the next six to eight months.
The rupee has traditionally been a depreciating currency, says Promoth Manghat, CEO of the Abu Dhabi-based UAE Exchange, one of the world’s largest remittance companies.
“Historically, the Indian rupee has been a depreciating currency, declining by between 6 and 7 per cent every year,” he told Emirates 24|7 in an earlier interview.
Here’s a bit of trivia for you. It may come as news to some that the rupee started at dollar parity in 1947, when India achieved its independence. At that time, the rupee followed the par value system, wherein the value of rupee was pegged at 4.15 grains of fine gold. The first depreciation of the rupee happened in 1966, when its value fell overnight by almost 56 per cent to 1.83 grains of fine gold.
That ‘devaluation’ meant that in the foreign exchange market, the rupee was cheaper by 37.5 per cent against the US dollar, from Rs4.75 per $1, it fell to Rs7.50 in a single stroke.
With that perspective, a further decline of 8 per cent in the next 12 months isn’t out of the question, and an exchange rate of Rs74 against $1 (Rs20.14 vs Dh1) is quite likely given the current dismal form of the Indian currency
The past week saw the rupee plummet by more than 1.5 per cent, its biggest weekly drop in about a year-and-a-half. The benchmark BSE Sensex stock market index exaggerated the rupee’s weekly decline, sinking by 1.9 per cent.
The Sensex is now down 6.5 per cent this year so far, with the rupee shedding more than 2.5 per cent of its worth in the same period.
Just one year ago, the rupee was trading at Rs16.68 against Dh1 (January 28, 2015) while the Sensex was scaling new heights and was soaring at 29,681 points.
From those lofty peaks last year, the rupee is weaker by almost 11 per cent while the benchmark equity index is down 17.6 per cent.
So, what happened and, more importantly, is it likely to continue?
To be fair, there are plenty of reasons for the decline, but we list the top 5 that we believe have been and will continue to impact the rupee the most going forward.
#1 Ballooning current account deficit: India’s exports have been falling short of covering its imports (largely of oil and gold) in recent years, and that’s been the bane of its problems. From a deficit of 1.3 per cent of GDP in 2007-08, the CAD more than tripled to 4.8 per cent in 2012-2013.
The government has taken a number of steps to curtail import of gold and electronics, and the recent drop in global oil prices are helping to get the ballooning CAD back under control. However, a slowing global economy means that India’s exports are being hit, and the country needs to keep its currency competitive (read: weaker) to match exports from China and other low-cost producers.
#2 Shrinking forex reserves: On January 16, the country announced that its foreign exchange reserves dipped below the $350-billion-mark for the first time in 15 weeks, with the year’s first fortnight witnessing an outgo of $3.22bn of foreign funds.
The reserves act as a cushion against dollar outflows and are a major weapon on the arsenal of the country’s apex bank to control volatility in the forex markets. In the past, the Reserve Bank of India has been known to pump the market with dollars from its reserves if the rupee depreciates violently. Thinner forex reserves mean that the RBI’s reactions will be timid at best.
#3 Slowing global growth: Investors are getting increasingly wary of the economic slowdown that seems to be spreading by the day. Among the BRICs, Brazil and Russia are already in recession, and China’s growth is slowing down dramatically.
The past six months have seen investors pull out a mammoth $600 billion from China, at the rate of $100bn a month. It still has plenty ($3.3 trillion) worth of foreign investments left, but the same cannot be said for any other emerging economy, including India. The only saving grace is that India is a net commodity importer and, therefore, the low global commodity prices help its finances unlike the other major emerging economies.
But if the world does fall into recession, there will be less demand for India’s soft exports (services), and that’ll translate into an imported recession. Even if there’s no hard landing, a global slowdown will continue to impact the Indian currency negatively.
#4 US recovery and end of QE: The US Federal Reserve raised interest rates by a quarter percentage point in December 2105 after almost a decade of near-zero borrowing cost for US consumers.
The Fed has indicated that it will be hiking the interest rate further this year on the back of a sustained US economic growth. This is already and will continue to boost the US dollar against other global currencies, thus exacerbating the woes of emerging market currencies.
The likelihood of further hikes this year doesn’t bode well for the Indian currency (and other emerging market currencies), and will put further downward pressure on the rupee.
#5 Flight to safety: When times are tough, the smart money looks for safe avenues (like the greenback and bullion) and tends to quit emerging markets fairly quickly. We have seen this happening over the past few months, and most analysts see this trend intensifying going forward this year.
Courtesy: Gulf Jobs