India Currency market : Mid 2015 review

Rupee in bullish mode maintaining price stability

Rupee is not far away from 2014 close of 63.03, despite huge foreign currency reserve build-up by RBI. This means that Rupee has not even adjusted for the 6M interest rate differential of around 7.5% between INR and USD, which is around Rs.2.35. The intra-2015 play is also restricted at 61.29-64.30 (between end January to mid June at door-to-door rate of 4.9%, not significant to call it as volatile). Rupee stability despite USD Index DXY up from 2014 close of 90.27 to over 100 (current at 97.50) is reflective of global optimism on India. Rupee gain against Euro is more visible at 10% from 2014 close of 76.25 to current 69.00 against intra-2015 low of 65.67. But for RBI absorbing excess foreign currency supply, USD/INR would have been way below 60!

The India market stake-holders can't ask for more! Importers and foreign currency borrowers have not lost staying unhedged gaining the time value. Exporters too got a good opportunity to cover medium/long term foreign currency assets on USD/INR spike above 64.00 for double benefit of price appreciation and time-value decay. RBI in $ buy mode provided better Rupee value for foreign investors. RBI took the pain of paying the interest rate differential (near-zero $ return against over 7.5% Rupee sterilisation cost) to keep Rupee value competitive to exporters and attractive to FII/FDI investors. All taken, it has been a glorious period for Rupee in H1/2015 before July stability at 63.35/63.40-63.65/63.70. What next?

Minimal impact from external headwinds

Rupee is seen strong to stay resilient to external headwinds. The bullish momentum in DXY into/and over 100 and risk of liquidity pull-out post FED rate hike act are not significant risk factors now. Availability of Euro zone liquidity, large appetite for India opportunities from other major economies and improved confidence of RBI to defend Rupee provide comfort through rest of 2015.

Domestic cues positive despite growth concerns

The structural benefit for India is the sharp decline in CAD from 4-7% of GDP to 1-2% with hope of turning CA neutral or surplus in the medium term. The CAD deficit means export of domestic capital for consumption of imported items. While this export is permanent in nature, funding the deficit through capital inflows is temporary, subject to exit any time. This structural imbalance is permanent risk on the Rupee exchange rate. The risk on exchange rate also cut the bandwidth of RBI to reduce interest rate significantly on fear from foreign capital repatriation. India opportunities to global investors will gain speed going forward attracting huge FDI inflows in the months/years ahead. FII appetite for India assets will stay valid in the absence of opportunities elsewhere. Rupee loss of traction with DXY rally gives exchange rate advantage for short term FII investors. So, combination of trend down in CAD and sustainable foreign currency inflows are huge positive for Rupee on the way forward. The risk however is from sudden downside shift of Rupee value, which importers and short term foreign currency borrowers should be mindful of. The sudden re-rating of USD/INR value is not uncommon, many importers have taken real loss with exporters losing on missed opportunity. All combined, Rupee price stability with bullish undertone is there to stay valid through rest of 2015, and adjustment if any will be lower than interest rate differential time value. On an end to end basis for 2015, USD/INR at 67.50 is break-even value on interest rate differential adjusted basis, without considering USD strength against global currencies. As Rupee remain steady against the USD while other major currencies decline, stake-holders need to be cautious on non-USD exports given the steep appreciation risk of Rupee against Euro, GBP, JPY etc in 2015.

Will RBI review range against huge supplies?

Post the Rupee recovery from 64.30 to 63.30, RBI has set administered range at 63.30/63.35-63.65/63.70 to ring-fence USD/INR exchange rate from news flows from Greece to enforce price stability. In July, there has been 4 sets of back-forth moves into the outer corridors. Now that Greece crisis is about to be resolved, it is high time RBI release its firm grip on the exchange rate. If done, immediate impact will be extension into 63.00-63.20 with shift of range focus from 63.30-63.70 to 63-63.50. However, retain set rest of 2015 strategic focus range at 63/63.35-64.65/65 with near term zoom-in focus at 63/63.15-63.85/64. Taking comfort from RBI both-way presence, importers are out (avoiding payment of time value) and exporters are in to absorb elevated FX premium, thereby creation of huge oversold $ position. This is the big risk in play now if lumpy PSU $ demand hits the market; break of 63.70 will shift RBI administration at 63.50-64.00. All combined, it is bias neutral between 63-63.50 and 63.50-63.70. RBI preference however would be for stability at upper-half of 63.30-64.30 to arrest Rupee getting into over-valued territory hurting exports and FDI flows.

EUR/INR at mid point of set strategic focus at 65.50/66-73/73.50; urged exporters to cover medium/long term receivables at higher end to ride the price appreciation and time value, also remember to have urged RBI to cut Euro reserves by selling EUR/INR instead of USD/INR when RBI was seen to sell $ for Rupee protection at 64-64.30 while EUR/INR at 72-73. The bearish undertone for EUR/USD is intact at 1.0450/1.06-1.0950/1.11 against USD/INR sideways mode at 63-64. Both combined, EUR/INR trading focus is seen at 67/67.50-70/70.50 with bias into lower end. FED shift into rate hike mode in Q4/2015 against ECB QE mode through 2016 sets up risk of revisit to 65.50-66.00 before end of 2015.

Moses Harding