5 factors that may push Rupee towards 69 to a dollar during the year

The Indian Rupee (INR) has been following an uneven path in the current year but compared to other currencies, it has behaved quite well. However, according to CARE Ratings, the rupee is expected to depreciate further in the current year and move towards 69 to a dollar range.

In a statement on May 25, 2016, the agency said, “The Federal Reserve had started the year on the back of an increase in rates by 25 bps announced on December 16th, convinced that the economy was on the recovery path and that policy would have to be proactive to contain a targeted inflation rate of 2%. However, conditions have been quite uncertain since then.”

The reaction of currencies across the world was negative as it is assumed that higher rates in the US will cause a reverse flow of investment from the rest of the world to the US and as the dollar would strengthen, the other currencies would be impacted.

“There is hence a good deal of volatility in the market every time the Fed has to make its announcement as another 25 bps hike would have the potential to impact investment flows,” it said.

CARE Ratings analysed 20 important currencies and the results showed that the rupee was one of the better performing currencies with a fall of only 1.2% as against 22% of Argentinian peso, Russian ruble by10.2%, South African rand by 9.1% and Mexican peso with 5.9% fall.

It said, “In the subsequent four months following January currencies have been quite volatile with both appreciation and depreciation taking place on a month on month basis. Almost all currencies witnessed appreciation in at least two of the succeeding months ending May (up to 24th).”

Out of the eight currencies that depreciated during this period, rupee was the third best with a 0.44% decline as against 26.91% in Argentinian peso with the Hong Kong dollar coming out at the top with only 0.15% fall.

The five major factors that continue to influence rupee are:

• Lower growth in trade deficit as well as CAD.

• Limited intervention by the RBI, at times through the derivative market.

• FPI flows which have been positive in April and May.

• Movement of interest rates in India based on RBI policy stance.

• The manner in which redemption of the swapped-FCNR (B) deposits are addressed in the second half of the year.