Rupee may hit 67 against dollar in FY2019

Mumbai: India’s widening current account deficit coupled with normalisation of loose policy in developed nations and soaring crude oil prices may weaken rupee towards Rs 67/$1 in the fiscal years that begun from April 1.

"We expect rupee (against $) to trade with a mild depreciation bias in CY2­018/FY2019, depreciating by 1.0-1.5 per cent on an average in FY2019 (ranging 64-67)," said Kotak Securities in a recent research report.

Rupee depreciated 0.48 per cent in the fiscal year ending March 31, 2018 to end at Rs 65.17/$1 compared with 2.1 per cent rise in the previous fiscal year, data analysed by TickerNews showed.

However, the weakness in the local currency is expected to be more prominent in the second half of the new fiscal year, as liquidity tightens in the global market owing to European Central Bank halting its asset purchases along with the Federal Reserve continuing with gradual normalisation of its monetary policy.

"Our BOP estimates also indicate that a slow and gradual depreciation is on the cards," said Suvodeep Rakshit, senior economist at Kotak Securities Rakshit.

India's current account deficit is expected to remain elevated at 1.9 per cent of the GDP in FY18 and around 2.1 per cent of GDP in FY19, pressurised by elevated crude oil prices due to rise in global commodity prices, recovery in domestic consumption without much scope for commensurate increase in capital flows.

Currently, India’s current account deficit (CAD) widened to 2 per cent of gross domestic product in the third quarter (Oct-Dec) of the current fiscal year from 1.2 per cent of GDP in the preceding quarter, data released by the RBI showed.

Overshooting global oil prices on OPEC and Russia-led supply curb further augmented the rupee negativity and build the case for higher trade deficit, given that our country is a major oil importer. OPEC, together with a group of non-OPEC producers led by Russia, started with-holding production in 2017 in order to prop up prices.

The deal to cut is scheduled to last through 2018, but there has been recent announcement by OPEC’s de-facto leader Saudi Arabia to extend the cuts into 2019.

Also in a recent meeting, Saudi Crown Prince Mohammed bin Salman said that Riyadh and Moscow were considering extending a short-term alliance on oil curbs to a 10-20 year pact to extend controls over world crude supplies for many years. Brent Crude oil prices appreciated 28.40 per cent in FY2017-18, with futures for May delivery currently trading at $69.73 per barrel on Wednesday.

India’s oil imports for February surged 32.05 per cent from a year ago to $10.19 billion.

In conjunction with current lower exports, the recent step by RBI to scrap quasi bank guarantee instruments such as the Letter of Undertaking (LoU) and Letter of Comfort (LC) will further worsen the export figures and turn import to be costlier.

"Higher import financing will lead to some shakiness, especially affecting the gems and jewellery sector, on account of recent LOU/LC ban," said Param Sarma, director and CEO of NSP Treasury Risk Management Services.

Adding to that, concerns over India’s fiscal health and hardening of inflation will lead to moderation in foreign investors’ appeal for Indian assets, a dealer with a state-run bank said.

India’s surging inflationary pressure that could shoot the CPI higher than the central banks forecasted levels can force RBI-led Monetary Policy Committee policymakers to raise interest rates sooner than anticipated.

Also globally, along with Federal Reserve’s steady rate hike path in FY18 and three more rate hike announcement for FY19, interest differential between India and US had declined, striking off the luster of investment returns in emerging economies like India.

The Federal Reserve raised interest rates by 25-basis point in its March monetary policy and forecasted at least two more hikes for 2018, highlighting its growing confidence that tax cuts and government spending will boost the US economy and inflation and spur more aggressive future tightening.

Globally, all major central banks including European Central Bank, Bank of England are on their path of reducing the bond buying programme and may soon take up the path of hiking rates along with US.

However, there is uncertainty on the timing, pace and the quantum of interest rate hikes to be conducted by the central banks globally.

On the domestic front, fiscal worries are also amplified by the government’s recent announcement of a populist budget this year.

With three major state elections viz Karnataka, Rajasthan, and Madhya Pradesh lined up, and Lok Sabha election nearing, investors’ sentiments will be cautious, weighing on the local currency. Foreign and domestic investors will keep eye on developments revolving the upcoming elections in key Indian states that will decide the fate for the Bharatiya Janata Party in the 2019 General Elections.

The government on Mon­day unveiled a 2.88 lakh crore market borrowing roa­d­map for 1HFY2019, which amounts to 47.56 per cent of government’s gross borrowing target for the year. Although this figure is 22.6 per cent lesser than Rs 3.72 lakh crore raised during the same period last financial year, there is a risk of higher borrowing amount in the second half of the upcoming financial year, with chances of fiscal slippage to fund developments schemes ahead of Lok Sabha election in 2019.

Sujit Kumar, senior economist of Union Bank of India said, "Although internally NDA win is priced in by market, investors will keep a watch on state elections as political uncertainty can dent the local currency, along with lower risk appetite globally, dovish CAD, trade deficit et all will put pressure on the rupee."

On similar line, Hiren Sharma, co-founder of Portia Advisory Services LLP said the political anxiety will keep rupee down in the 2QFY2018-19. The sharp depreciation in dollar may now be capped following the unveiling of US President Donald Trump’s tax policy and spending bill. Dollar may mostly recover with the negative effect of US trade protectionism being a non-event for local currency.

The pace of economic growth, the strength of the recovery in corporate earnings, the magnitude of initial public offerings (IPO), the result of the resolution of NPAs and the bank recapitalisation programme would impact foreign investors’ interest in the domestic equity market. Sujan Hazra, chief economist of Anand Rathi said,"there has been correction in the dollar, with the gradual pace of rate hike by Fed, rupee will mostly depreciate towards Rs 67/$1."

Appreciation in rupee is also stemmed by expected moderation in the overseas investment in the local equity market, clubbed with less bracket available in the government debt market. Global markets have fully discounted all the macroeconomic and growth positives in advance and going overboard on valuation just based on expected unending inflows from global sources.