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Anil Bhansali
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January 13, 2012
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The outlook for USD is positive – the dollar index (DXY), currently at 80.94, is expected to rise to 82.5 by the year-end, but is not likely to revisit the peak of 89 seen in March 2009. USD is benefiting from the continuing weak ness of Euro. The Euro zone is slipping in to recession, while US economy is recovering, even if the signs of recovery are still weak. If US Fed resorts to QE3 (for purchase of mortgage securities), the rise in yields may hold back USD from strengthening further.
The JPY has maintained its strength against USD and Euro, moving in a narrow range – the USD/JPY is expected to be around 85 by year-end, though we do not expect a major change before March 2012.
Over the last half year, Indian Rupee has been the worst performing currency in Asia, losing over 16% of its value. The Rupee is expected to be under pressure during first half of the year, on account of elevated current account deficit and short-term rollover pressures. The interest advantage may help bring in more NRI funds, but the inflows may not be adequate to arrest Rupee slide. We however do not expect a steep fall to 60 levels, as forecast by CLSA, particularly considering RBI has become more pro-active in monitoring the currency.
The current account deficit in excess of USD 55 bn, and payment obligations of Indian companies amounting to USD 130 bn during the year will keep up the pressure on Rupee. However, recent measures of RBI tightening control on trading position of banks and use of hedging instruments, helped Rupee gain by about 5.3% over the last three weeks.
Rupee depreciation has been positive for exports, though import costs have also gone up, particularly, in case of oil. Growth in exports was muted on account of declining demand from US and Europe. During the period Apr-Nov 2011, exports grew by 33.2% to USD 192. bn, while imports grew by 30.2% to USD 310 bn on y-o-y basis.
FII inflows during the current f y till Nov 11, at USD 35 bn were less by 26% compared to corresponding previous period.
Global concerns, deteriorating external sector outlook, worsening deficit and delay in economic reforms are negative factors for Rupee. However, expectations of a cyclical turn of markets, softening of interest rates and recent rise in FII investments in debt market are some of the factors that would compensate for the weaknesses. Taking a balanced view, we expect Rupee to move within a range of 49.00 – 55.00 during the year 2012. We may say this is a moderation of the range of 47.50 – 56.70 resulting from our technical analysis.
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Mecklai Financial
Services Ltd. is a consulting company exclusively focused on treasury
risk management.
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