Another-Record-Low: Is Rupee Stuck in a Perfect Storm?

Rupee all-time-Low: From Trump's warning against the de-dollarisation dream of BRICS (Brazil, Russia, India, China and South Africa) to domestic woes like inflation, a lot is not working well for the Rupee. The value of the domestic currency touched yet another low of Rs 84.80 earlier this week.

Amidst this, the entry of RBI’s new governor, Sanjay Malhotra surely comes at a complicated time. With inflation well-above the 4 per cent target, slower growth road and a tightened regulatory environment already playing out in the background, maintaining the value of Rupee amidst major geopolitical events remains a major challenge.

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Many analysts are already signaling increased fluctuations in the value of domestic currency.

“The RBI has always sought to build its forex reserves buffer (precautionary motive) and smooth out volatility- two aspects that may continue under the new management. However, it is possible that a bit more flexibility is allowed in currency fluctuations, going forward, as compared to the relatively tighter leash seen over the last one year and more,” Nomura stated in its report.

Domestic factors like lower Q2 GDP figure at 5.4 per cent, decline in public spending and higher interest rates for long, are already compounding problems for Rupee’s value against the backdrop of a stronger dollar. But there is one more upcoming event that could make things worse for Rupee.

Japan’s interest rate decision in focus

It won’t be wrong to say that when Trump called out world economies to find another ‘sucker’ during talks on de-dollarisation, everyone thought the strengthening of the dollar was the biggest fear for emerging market currencies. But for India, another country’s monetary policy was looming in the background, and that is Japan.

If BoJ (Bank of Japan) decides to increase its interest rate in the upcoming monetary policy meeting on December 18, things could get way worse for the Indian Rupee. This is primarily because the bond yields of the east-Asian nation could witness a surge, making assets of emerging markets less attractive for investors and eventually putting pressure on Rupee's value.

The BoJ’s policy is the incremental risk for Asia forex as markets price in a hike in December, pushing up the JGB (Japanese Government Bond) 10-year yield to 1.1 per cent levels, Elara Capital stated in a report.

And what could turn out to be even worse for the domestic currency is the intersection of Japan's rate hike with the Fed's prospective rate pause. Both these scenarios can make emerging markets less attractive for investors, thus putting more pressure on their currencies.

“Confluence of Fed’s pause and likely BoJ hike is risk negative for EM globally,” the investment firm further added.

Rahul Kalantri, VP-commodities at Mehta Equities expects the rupee to remain volatile this week amid fluctuations in the dollar index and domestic equity markets and crude oil. "We are expecting the pair could trade in the range of 84.32-85.45," he said.

Still better than peers?

Even after record lows, many analysts believe that India’s currency has performed relatively better than other emerging market currencies. “Contrary to general belief, since the US elections, the rupee has depreciated significantly against the dollar. However, it has performed relatively better than many other Asian currencies. This makes it a relatively stable currency,” Manish Bhandari, CEO and portfolio manager of Vallum Capital Advisors.

On the domestic front, a potential pickup in the economic growth, owing to increased government spending and a possible push to the consumption cycle, can help in keeping the value of Rupee intact. Lower oil prices can also benefit the domestic currency.

"Rupee has continued underperforming for more than a year due to a continuous outflow of funds from Indian financial markets. We are optimistic that the new governor is expected to implement policies to stabilize the economy, attract foreign investment and strengthen the Rupee," said Kalantri.

While the near-term outlook remains unfavorable for the Rupee, the long-term trajectory will hinge on two things: new RBI governor's policy view to tackle out domestic woes and how the geopolitical outlook pans out in the coming time.