Rupee appreciation may fizzle out at 80

Market


MUMBAI : The Indian rupee may be settling in a new normal of 80 to 83 to the dollar, as elevated energy prices and shifting foreign portfolio flows over the short term exert pressure on the exchange rate. Despite the rupee recovering from a record low of 83 to a dollar in October, the local currency may find it difficult to sustain levels below 80, industry executives and analysts said.

The rupee is unlikely to remain consistently below the 80-mark over the next three to six months, said Seshagiri Rao, joint managing director and group chief financial officer of JSW Steel Ltd, a view shared by currency analysts and economists.

Volatile phase

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Volatile phase

“Fundamentally, I don’t see energy prices dropping below the lower band of $80-100 per barrel range quickly, simply because extra capacities to cater to global demand aren’t in place. While flows (foreign portfolio investments in equity) could revive, global energy costs are unlikely to decline significantly to pull down India’s import bill. Oil could trade at $90-95,” Rao said.

On Monday, the rupee weakened 45 paise to the dollar to close at 81.26, according to Bloomberg data. On Friday, the local unit gained the most in four years, rising over 100 paise after US retail prices grew far slower than expected, rekindling hopes that the Fed would temper the pace of rate hikes.

Encouraging company earnings could attract foreign flows; however, if the valuations of US and Chinese markets are more attractive, FPI investments would flow to those markets, at least in the short term and cap rupee appreciation, Rao said. “Rupee could remain in an 80-83 band to the dollar over six months or so,” he said.

Volatility will be the “order of the day” in FY23, said D.K. Joshi, chief economist at Crisil, endorsing Rao’s views on the rupee.

“There has to be a significant change at the fundamental level for the rupee to appreciate significantly below the 80 per dollar mark,” said Joshi. “Change at the productivity level, lower crude prices and a host of other factors would determine that.”

The rupee fell 9.17% from 74.43 to a dollar on 12 November last year to 81.26 on Monday, most of it after the Ukraine war sent energy prices soaring and FPIs net-sold shares worth $19.12 billion in 2022. While analysts forecast the rupee to benefit from an expected Fed slowdown on rate hikes, analysts question this logic with similar actions from other central bankers.

“If the Fed slows on hikes, so would other central bankers, which could obviate any benefits of our currency strengthening relative to the dollar,” said Anindya Banerjee, head of currency derivatives at Kotak Securities, who expects the rupee to move in a range of 81.30-82.30 by year-end.

Madan Sabnavis, chief economist at Bank of Baroda, sees the rupee trending between 81 and 82.50 in the short term.

While 80 remains a stiff resistance, JSW Steel’s Rao doesn’t think the 83 mark will be breached either, thanks to India’s real interest rate being positive against a negative real interest rate in the US. The real rate is calculated by deducting inflation from the 10-year benchmark government bond rate.

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