The rupee has started declining…..

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The rupee has started declining…..

 

The rupee has started a downward movement once again since 9th December which is almost a month after the USA Elections results were out. The rupee had strengthened earlier between 28th November and 8th December 2016.  The movement of the rupee-dollar rate is depicted in the chart below.

 

 

 

The rupee appeared to be fairly resilient when the FCNR (B) redemption became due and was well managed by the RBI. The shock however has been administered in the form of the US Elections where there is a perception that the new government would be more ‘closed’. Also it is expected that the Donald Trump Government will be aggressive with fiscal stimulus to the economy which in turn will raise the spectre of inflation thus prompting the Federal Reserve to increase interest rates further.

 

The Federal Reserve had increased rates by 25 bps on the 14th of December which has led to expectations now of at least another 50 bps rate hike in 2017 with some forecasts going up to 100 bps. Higher rates in the US tend to impact flow of investments which in turn has also affected the rupee.

 

Some of the factors responsible for these movements are:

 

1.       FII equity flows have been negative $ 3 bn in the period November 9-December 22.

2.       FII debt flows were impacted significantly by these developments with the decline being double at $ 6 bn during this period. Here, the higher interest rate regime in the USA coupled with declining interest rate regime in India would tend to exacerbate the situation further going ahead.

3.       The trade balance has been stable but is expected to widen given that exports still remain lackluster and imports would keep expanding as oil prices increase and put pressure on the imports bill.

4.       The US final decision on outsourcing is also in the minds of the market as the Indian IT sector could be impacted in case an extreme measure is taken by the government.

5.       Forex reserves have decline by a little over $ 5 bn between November 4th and December 9. This could be higher in the following two weeks (for which data will be available with a lag).

 

Under these conditions we maintain our earlier stance that the rupee will be in the Rs 69-69.50/$ bracket by March with both the foreign funds flows and crude oil prices determining the pace of decline. 

 

 

Reference : CARE Rating 

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