What next for Rupee beyond 61.70-62.20?

The expectation of MARKET PULSE for 2014 was for consolidation at 58-63 with back-and-forth trading mode; as per script, Rupee posted strong recovery from 63.32 (low on 27th January) to 58.33 (high on 23rd May). The outlook thereafter was for strong dollar recovery from 58.35, followed by lift of base at 60.20 for 61.95-62.20 target by/before end of 2014. The back-and-forth moves set up good hedging opportunities both-ways for passive entities and great P&L benefits (import cost reduction and/or upside on export realisation) for the pro-active hedgers, while it was party-time for strategic traders. What next?

USD/INR is already into near term play at 61.20/61.45-61.95/62.20 with short/medium term base at 60.20-60.70. During this period 6M $ found stability at 63.25-64.25 and 12M $ at 65.50-66.50; overshoot either-way didn't sustain for long! Over all, USD/INR spot value got adjusted for the time-decay, while RBI ensured that Rupee value is administered at level attractive to exports and foreign currency inflows. The risk factors on Rupee are from interest rate squeeze between India & US, medium/long term bullish momentum of the USD, bullish correction in imported commodity assets and RBI hunger to build $ reserves to ring-fence unforeseen (and sudden) shocks from FII mood-swings. The positive cues are from gradual baby-steps improvement in India macroeconomic fundamentals (with high confidence on India sovereign rating upgrade in 2015) and huge pipe-line FDI (and long term) inflows and shift of foreign investor appetite from China to India (seen as the most-favoured investment destination in the BRICS group). All taken, while long-term (2019-2024) story is good for Rupee, concerns is in the short/medium term; having said this, long term optimism will limit Rupee weakness into 2015 at 62.85-63.35 for consolidation at 60-63. What can go wrong? The bolt from the blue can be from execution failure of Narendra Modi Government (diluting the pent-up hope and optimism) and geo-political risks; both are seen now as low probability risks. On the other side, combined impact from external tailwinds (lower Brent, higher demand for India produced goods & services and dilution in $ bullish momentum from Euro zone recovery) and realisation of domestic euophoria (GDP into higher end of 5.5-7.5%, CPI stability around/sub 6% and Swiss-money driven lower fiscal deficit) will be manna from the blue to set up long term Rupee recovery adjusting the 2008-2013 excessive weakness from 39.20 to 68.85.

For now, let us set long term focus (into 2019) at 58.33-68.85 with attention on the said factors that could trigger either the "bolt from the blue" or "manna from the heaven"; in either case, do not expect overshoot either-way!? For rest of 2014, retain focus for Rupee at 60.95/61.20-61.95/62.20 not ruling out downside extension beyond 62.20 into 62.85-63.35 on combination of DXY rally over 86.75 and delivery of rate cut from RBI on 2nd December.

Moses Harding