Rupee outlook: Indian currency may track US dollar index

In a few days from now, half of the calendar year (CY) 2018 will be over. I am sure, this is not a profound statement but only a reminder to ourselves that, time is ticking and slipping away slowly through the proverbial closed fist. What it leaves behind is some imprints which were almost “invisible” in the past, but surely more prominent now. For example, when we started our journey at the beginning of 2018, there were fears of an escalation of “trade war” between two most important global trading partners (USA and China) and fear of its effects.

If that’s not enough, we have other things to worry about. Surging global oil prices have already derailed “inflation” expectations in many import-dependent countries. The ongoing OPEC meeting can throw a pointer towards future oil supply, thus providing direction of the global oil price itself. Most of the experts are now hoping to tide over the rest of CY 2018 in a $70-80/ barrel of Brent Crude.

Now, as far as the US interest rate and inflation are concerned, the US Fed brought in 25 bps hike in the last FOMC meeting and there is still a possibility of at least two more rate hikes in CY 2018. The US yields have shot up as a result inviting the attention of global money bags. This has resulted in reassessing investment strategies by global money managers who would have seen merit in pulling out of emerging markets especially investments in EM bonds and put them back on safer US bonds. This, in turn, has resulted in a massive turnaround in the movement of dollar pulling it towards 95 levels. Technically speaking, the dollar index is now facing strong resistance around 95.14 which might be difficult to break in a hurry.

In India, the rupee depreciated around 8.25% in a span of six months. The dollar-rupee pair which was quoting around 63.2450 around the beginning of CY2018 touched a high of 68.46 in the month of May 2018. Thereafter the pair did turn around but again pushed towards 68.4600 (reaching a high of 68.39 on June 19, 2018) mainly on global cues. We also must remember that the rupee is not too much of an outlier.

Now a cursory look at the dollar-rupee charts tells us that there is huge resistance around 68.5000 pivots and if that is taken at 68.8500.

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Since I am envisaging a sideways trading in broader dollar index along with what we see from charts in the dollar-rupee, I am tempted to say that the dollar-rupee pair might also get into a similar range-bound trading in the coming days/weeks within a 67.5000-68.4000 range. In India, inflation trajectory and stubbornness of inflation seem to have prompted a 25 bps hike recently. If the conditions persist in a similar manner, we may expect another rate hike in CY 2018.

Bhaskar Panda, DNA
(The writer is senior regional head, Treasury Advisory Group, HDFC Bank)