73 will provide great resistance, but don’t rule out further rupee depreciation

“Nobody knows the future with certainty. We can, however, identify patterns of change.” (Alvin Toffler)- and it’s not at all easy to identify ‘patterns of change’ early, as components of ‘change’ alter shape and size willy-nilly. Hence, it’s utmost important to identify factors, the impact of which ultimately shape the “future”. Now, to understand this philosophical construct against a harsh backdrop of real events that have shaped ‘markets’ or would shape the “markets”, is a challenge, I would try to decipher here.

It’s like old times again: Of late, a lot of people have started likening recent bouts of protectionism to what had prevailed during years leading to “great depression”. Under the US President Don In a fresh salvo last week, as much as $200 billion of Chinese exports to the US had been brought under special tariffs of varying degrees. This has resulted in Chinese retaliating on US imports into China to an extent of $ 60 bn.

If this is not enough, an almost full employment situation with adequate higher inflation is forcing the US Federal Reserve to hike interest rates. As a result, the 10-year UST yield has surpassed 3% and even short-term yield like two-year UST is almost in the touching distance of 3%. The dollar index thus has been hovering around 95 pivots, putting immense pressure on EM economies.

Fragile five encores? During the height of uncertainty following US Fed’s decision to withdraw stimulus, way back in 2013 (in popular parlance, it’s mentioned as Taper Tantrum), Morgan Stanley had coined a new acronym, the fragile five which had Brazil, Indonesia, India, South Africa and Turkey as it’s members. The common thread that ran among all these nations were that all of them ran twin deficits and all of the members were dependent on foreign borrowings. If things were bad then for these “fragile five”, things haven’t been too great for these countries even today.

In fact, there are more in this club now including Argentina and other Economies suffering from CAD of various degrees. Among all, India perhaps is much more stable in terms of depth of the market, savings and consumer profile. But, the uncertainty caused by the US protectionism backed with high US interest rates, high global oil prices and lower capital flows, have hastened the fall of the rupee against dollar in the recent past. The rupee not only surpassed the earlier ‘taper tantrum’ low of 68.8500 with a great degree by touching a low of 73.0000 against $ but also has earned the notoriety of depreciating more in percentage terms among all Asian nations.

The million dollar question is thus, whether this is the end of rupee depreciation or is it still the beginning of a long journey ahead? The answer is not simple but the prognosis is not so bad either. Given the uncertainties overseas and local dynamics, the dollar-rupee pair is going to remain volatile. Obviously, 73.0000 will provide great resistance in the short-term but I don’t rule out further rupee depreciation. Hence, it might make sense to cover short-term “payables” to remain safe rather than be sorry forever.

By, Bhaskar Panda
(The writer is senior regional head-treasury advisory group, HDFC Bank)

Source: DNA Money