The recent weakness in the rupee has to be seen in the broad context of dollar strength and the weakening of most of the emerging market currencies, says Shilan Shah, Senior India economist, Capital Economics (Asia).
Where is the rupee going? Do you think that 69-70 is only a matter of time?
It is difficult to say. I would not be surprised if the rupee drops to 69 in the near term. There has obviously been broader weakness today. The point is it does not necessarily matter where we reach. This is basically a reflection of broad dollar strength. We have seen most of the emerging market currencies fall over the past few weeks and some of them much more significantly than the rupee has.
If things become increasingly volatile, then the RBI is essentially able to act from a position of strength. Foreign exchange reserves are close to record highs although it has been intervening in FX markets recently to smooth some day-to-day volatility. The current account deficit is much smaller now than it was say five years ago during the taper tantrums.
There is really no reason to expect a real sharp run on the currency. It is potentially going to weaken a bit further but we do not think that there is going to be anything too disorderly.
Actually, over the next six months or so, there are a couple of factors that could see the rupee rebound. There is often a snap back in terms of EM currency once the dollar has been on a broad rally. That could help to strengthen the currency over the coming months. If oil prices were to fall back, then that would also help. Finally, we expect the Reserve Bank of India to tighten monetary policy in its upcoming policy meet in the beginning of June. I do not see the interest rate differential but then again that should be supportive of the rupee. So, we do not think there is anything to worry about.
This might be a rub-off effect of what is happening globally and how other EMs are doing. In that backdrop, the Indian rupee is probably seeing some depreciation but not underperforming as such. The real story is what is happening in dollar. The dollar index was depreciating and now it has started moving higher from 88 odd levels to 94 or so. Where, according to you, is the dollar index moving?
It is probably rising in anticipation of tighter monetary policy in the US and a number of measures including stronger wage growth in the US. We think it will ultimately get priced in and so we do not think that the rally would probably have a great deal further to run. You have to consider the recent weakness in the rupee in the broad context of dollar strength and the weakening of most of the emerging market currencies.