Rupee outlook: 5 reasons could trigger a breakout in Re from current consolidation against US Dollar


By Amit Pabari

It is truly said that, “The ultimate resource in economic development is people. It is people, not capital or raw material that develops an economy.” Multiple waves of the coronavirus pandemic are challenging humanity as never before and have stalled an overall economic recovery across the globe.

India has been under no exception. So far India has only 8.37% of their population fully vaccinated — far behind the 40% mark for advanced economies such as the US, UK, Germany, France, and Canada. As the global economic recovery continues with the opening of economies, the “widening gap” between advanced and developing economies could continue to hurt the riskier asset class.

For the USDINR pair, the journey so far has been like a roller coaster ride from 75.20 in April to 72.40 in May and again jump towards 74.90 post June Fed meeting. However, it has been on a silent mode since then and flirting in the range of 74.00-74.90 zone. Well, history always suggests that the longer the pair trades range-bound, the sharper and stronger is the breakout. Below are the major 5 reasons that could lead to a resumption of depreciating move in Rupee:

Stronger US job report: The Federal Reserve Chairman Jerome Powell in his recent meeting statement had mentioned that he would like to see strong jobs reports before winding down the central bank’s $120 billion a month bond-buying program. It seems the market heard its requirement for tapering and delivered partially on his expectation. The recently released July job report suggests that Nonfarm payrolls rose by a seasonally adjusted 943,000 in July, the best gain in 11 months, and the unemployment rate, fell to 5.4% from 5.9% in June to touch the lowest level since the pandemic took hold in the U.S. in March 2020.

RBI to absorb excess liquidity, eyeing policy normalization: The RBI governor in his recent monetary policy rightly addressed the issue of excess liquidity in the banking system by announcing higher fortnightly variable rate reverse repo (VRRR) auctions. This will definitely curb rising asset class prices and help to tame the inflationary pressure. However, they have revised Q3 and Q4 GDP lower and inflation target higher for this fiscal. If inflation in the upcoming remains elevated above the central bank’s target levels, then local currency could be stressed against the USD.

Hawkish Jerome(Fed Governor) at Jackson Hole: Markets will be watching Powell’s expected Jackson Hole appearance (August 26–28) for any clues to see if the current 2023 rate hike ‘lift off’ is adjusted toward 2022. The July FOMC policy statement read a bit more hawkish than one might have expected. However, the FOMC meeting minutes contain no mention of the Delta variant, which is commanding plenty of attention as of late. Divergences in policy support are a second source of the deepening divide among emerging and developed markets. Thus any clue for tapering at Jackson Hole will pull inflows back to a safe haven from the EM.

Asian markets are facing higher Delta cases and FII withdrawal: The number of cases in the Asian belt has been rising continuously. So far rupee has been relatively resilient on the back of IPO-related inflows despite lingering Delta variant concerns. Uncertainty over delta variant is adding nervousness in investors as FII were seen selling nearly $1bn in July. However, the impact was not seen visible in Indian equities as DII remained supportive. Going ahead, investor risk appetite could get dented with an increase in the count of cases and they could move towards safety-“US dollar”.

Growing concerns of China’s technology stocks following a regulatory crackdown: Big Chinese tech stocks lost hundreds of billions of dollars in combined market value in July, reflecting rising investor concern about how the sector will fare under a barrage of regulatory pressure from Beijing. Further, China’s factory activity at a 17-month low amid rising costs and extreme weather hints reversal in the global economic cycle. This could badly impact the Indian Rupee and we could see a depreciating move.

Indian Rupee Outlook

The above five reasons seems enough for the USDINR pair to trigger a breakout from the current consolidation phase of 74.10-75.00 zone. The chances of odds for a breakout are continuously increasing as divergence has been observed between the Indian market and its other emerging market peers. Moreover, the August seasonality anomaly (go through the below chart for reference) has been a mixed month for the rupee over the last 10 years, but whenever Rupee went on negative mode, it has depreciated by more than 3.5%. Here, one should recollect the memory of the August 2013 move, when Rupee lost almost 8.77% against USD. Hence, the downside seems very much limited in Dollar-Rupee, probably up to 74.00-74.10, and convergence of all the given points could add fuel again in the depreciating move in the Rupee towards 74.90-75.00 over a short term and 75.30-75.50 over the medium term.  

(Amit Pabari is the Managing Director of CR Forex Advisors. Views expressed are the author’s own.)

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