India currency market: Validation of Rupee resilience to USD strength against global currencies

Rupee steady against USD and strong against others

It is credit to Raghuram Rajan for efficient management of USD/INR with intent to squeeze the trading band to restrict price volatility to cut damage on the hedging community - investors, lenders, borrowers, importers and exporters. Post Rajan taking command at RBI, the trading range has been squeezed from 68.85-58.33 (August 2013 to May 2014) to 60.20-63.89 (September 2014 to December 2014) to 61.29 to 63.00 (January to March 2015). In the meanwhile, EUR/INR collapsed from August 2013 high of 92.00 to 65.75 by March 2015. It is to the delight of all stake holders that Rupee has emerged as the strongest currency of the World. But for the gracious support extended to the USD by RBI, Rupee would have gained against the USD despite DXY rally from 78.90 to over 100 since May 2014. Bullish momentum in equity and bond market against stable (to firm) exchange rate is to the delight of off-shore investors.

It is all to do with strong external appetite for India assets and lead-lag impact from hedging community. The combination of demand-supply dynamics from cash and forward market leading to excess supply of US dollar over demand means RBI stepping in to provide equilibrium absorbing the excess $ supply. This is evident from build-up of $ reserves to $340 billion and on the flip side, helped to prevent Rupee weakness on sudden negative development or meeting bulky dollar demand. The presence on both sides has established Rupee stability at 61-63 to the comfort of all stakeholders. Our strategy to stay dynamic (and fleet-footed) playing end-to-end swings have paid dividends, buying short term dollars at forward value below 62.00 and to sell 12M dollars at 67.50-68.00.

Most cues continue to stay in Rupee favour despite bullish outlook on the dollar

The cues in support of Rupee are from comfortable CAD (stability in Brent Crude at $45-65 and weak Gold at $1000-1250), more than desired off-shore inflows (chasing India opportunities built over solid macroeconomic fundamentals), increased appetite for unhedged USD debt (to take advantage of carry-trade against currency stability), solid NRI inflows (higher allocation for India investments) and last but not the least, the evolution of Make-in-India story to build sustainable scale in India exports. All combined, it looks great for Rupee going forward.

Should the administered USD/INR trading band be restricted at 61-63?

There are signs of squeeze in the trading band at 62-63, with RBI presence at both ends. The squeeze is necessitated to build reserves before FED turns hawkish through start of rate-hike. This fear has made RBI to buy at any level between 62.20-62.70, thus preventing extended USD weakness to 61.00-61.50. This stance has proved good as RBI has also prevented Rupee weakness beyond 63 into 64.00. This management may continue to stay operative till clarity on the timing of 1st rate-hike from FED, expected to be at some point between June-December 2015. Till such time, USD/INR is expected to be in back-and-forth mode at 62-63 and in the absence of RBI, bias is neutral between 61 and 64.

Given the mixed cues in the short term, retain hedging strategy as before; now tracking end Apr'15 $ at 62.35/62.50-63.20/63.35; 3M $ at 63-64 and 12M $ at 66.50-67.50, break-out either-way is tough to sustain. This strategy will establish spot stability at 61.85/62.00-62.85/63.00, and would send panic signals on break-out either-way. Arun Jaitley has made his point clear and loud that exchange rate stability within a broad range of 58/60-63/65 is OK given the neutral impact between inflation and exports; at lower end benefiting from lower landed cost of imports and at higher end supporting the exporters and investors. While RBI may not be in disagreement with this view (and approach), it may release firm grip when desirable reserves are built and shift of system liquidity from deficit to surplus. This stance of wider band may be to the delight of traders, but would be at risk to hedging community to put in place risk management strategies balancing greed and prudence. So, stakeholders may need to tighten their belts, not taking the Rupee exchange rate for granted.

EUR/INR played to the script retaining near/short term stability against medium/long term weakness

The EUR/INR bearish chase began along with DXY bullish outlook from 80-85 to 100. The zoom-in pre and post FOMC chase began at 71.00-71.25 for pre FOMC exit at 65.75-66.00 for post FOMC recovery to 69.00-69.25 before down. To the script, saw push down from 71.18 to 65.75, followed by recovery to 69.25 before down to intermediate support zone at 67.50-68.00. What next?

Most (if not all) cues stay in support of USD, not withstanding QE driven positive economic data from major economies of the Euro zone. As FED prepares for rate hike in second half of 2015 against extended QE/NIRP by ECB through 2016-2017, and resultant interest rate advantage in favour of the USD retain long term bullish undertone. Economic advantage is also with the US against Euro Zone low growth - deflation dynamics. The only positive factor is the fear of concerted Central Banks intervention to protect major and emerging markets currencies against sharp decline. Till that situation arises, EUR/USD is seen locked at 1.0450/1.05-1.1050/1.12 in back-and-forth mode. If seen against consolidation in USD/INR at 62-63, EUR/INR is expected to stay in sideways mode at 65.75/66-69/69.25.  It is important to stay hedged on medium/long term exports (at higher end and beyond) and be fleet-footed on near/short term exposures with back-and-forth play.

All taken, the volatility play will be between FED stance on rate-hike and intervention fears of Central Banks. It is important to have close track on economic data print and feel of the pulse of Central Banks.

Moses Harding