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Weakness in rupee seen continuing in 2015

The weakness in the rupee is seen continuing going into 2015 amid concerns of foreign flows slowing down to India and it may even touch 64 a dollar in near term. However, the weakness in rupee is seen temporary as the Reserve bank of India (RBI) has been building strong foreign exchange reserves.

Monday the rupee weakened to a ten-and-a-half month low of 62.96 before closing the day at 62.95 compared with Friday’s close of 62.30. The rupee tracked steep losses in other emerging market currencies as foreign investors started selling their portfolios ahead of the end of the year. The rupee had ended at 63.10 on January 27, 2014.

“There will be continued gentle depreciation of the rupee. We must remember that dollar itself has strengthened against other currencies in a dramatic way. Given that some amount of depreciation of the rupee so as to protect the Real Effective Exchange Rate or REER is warranted,” said Ananth Narayan, Regional Head- financial markets, South Asia, Standard Chartered Bank. Narayan added that if foreign inflows were to slow down a bit, there be some mismatch as inflows will not make up for the current account deficit. “This is my personal view that the rupee could touch 64 somewhere in the middle of 2015,” he said.

Since the start of 2014 the rupee has weakened by almost 2 per cent and experts see it breaching the 63 mark soon.

“We expect RBI to mount a full barreled defense to anchor expectations, at 65 per dollar selling, say, up to $ 20 billion, if need be. Given the low import cover, the rupee has tended to fall below the previous low in each successive rounds of volatility. The rupee dropped to 53 per dollar during the end-2011 European crisis. It fell further to 57 per dollar during the 2012 Greek crisis. The rupee collapsed to 68 per dollar during the taper tantrum of 2013. Against this backdrop, governor Raghuram Rajan will not want to take chances with rupee expectations beyond 65 per dollar,” said Indranil Sen Gupta, India economist at Bank of America Merrill Lynch in a note to clients.

Latest data shows that RBI’s foreign exchange reserves fell by $ 1.65 billion for the week ending December 5 to $ 314.66 billion. In the current calendar year net flows from Foreign Institutional Investors (FIIs) stood at $ 43.35 billion till December 12.

“While the near-term picture suggests it will be harder for the rupee to outperform, on the back of ongoing foreign exchange purchases by the central banks, we do think this policy is prudent given the increase in foreign exchange volatility we expect in 2015. The RBI’s improved ability to curb topside volatility in dollar-rupee will help the currency be more resilient to both global and local risks next year,” said HSBC in a note to clients on Monday.

RBI’s net dollar purchases from the market almost doubled in October to $ 2.7 billion compared with $ 1.44 billion the previous month.

Few experts see the rupee touching the 64 mark in the first quarter of 2015 itself. “The possibility of rupee touching 64 against the dollar is there in the first quarter of the calendar year 2015 due to strong US economic data. But those levels will not be sustained for a long time,” said Anindya Banerjee, currency analyst, Kotak Securities.


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