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On The Edge

September 2016

The dollar would continue to strengthen as prospects of rate hike will support the greenback on lower levels, says Abhishek Goenka, Founder and CEO, IFA Global DMCC

Since the start of this year volatility in rupee has dropped and the local currency has traded within a range of 66.00 and 68.74. One-year forward premiums have also eroded from 450 to 400 levels suggest that booking long term exports has been beneficial compared to booking short term exports. On the other hand, eroding premiums has also benefited importers who usually hedge their payments just before the due date. This year bulls and bears have had a tough fight, which suggests that the Reserve Bank of India has been able to keep the vols low for the currency. But it will be too soon to comment that the scenario may remain the same all throughout the year as impact of some of the major events are yet to come.

Brexit “hopefully” is behind us and sighting the impact that the Bank of England decided to cut rates by 25bps to record lows after the event. But despite a major fall in pound the impact of the same on India or the rupee has been relatively low as FIIs have been bullish on India. The ‘overweight’ stance of the FIIs on India is evitable by the fund flows in the equity segment. The year-to-date inflows by the FIIs have been to the tune of $4.9billion and at the same time Nifty Index also outperformed other Asian indices and remained the second performing index in the Asian pack.

Currencies-chart-Sep16

On the domestic front, market participants are awaiting for clarity on redemption of FCNR deposit that is spread across three-months starting September to November. The RBI in its latest policy statement has clarified that the impact would be comparatively low as it has managed to hedge its open position via forwards. But slowing global growth, Fed considering raising rates, Brexit impact and slowdown in China are some of the factors that are beyond RBI’s control that could further strengthen the dollar and might weigh on the rupee. In this month major central banks are expected to come out with their policy decision and amongst those, policy statement of US, Japan and UK will be keenly watched considering the recent hiccups in the respective economy.

Recently some officials at the Federal Reserve have hinted that the central bank would consider raising rates as early as September supporting the greenback on lower levels. And at the Jackson Hole symposium Fed chair Janet Yellen extended hopes of raising rates this year but keeping a clause of data dependency intact. Recent economic data such as the employment as well as the inflation have supported the rate hike stance and any hints towards it will continue to extend gains for the dollar. Market participants in this year will not only look at the steps taken by the Federal Reserve but will also look at the results of US elections scheduled in November. In the past US elections have been considered one of the most important events and volatility tends to increase in the election year. We believe that the race towards election is a very close call and a larger impact could be seen on taxes, health care, immigration policies and Federal regulations.

Overall our view on the rupee continues to be negative and expect that any major appreciation due to consistent fund inflows will be set-off by the central bank intervention. The RBI has been actively intervening to curb the volatility of the currency and also buying dollar on lower levels to curtail major appreciation of the rupee. Intervention of the RBI is quite evitable and reflected in the FX reserve that has risen by over $16.81 billion to $367.17 billion in the past eight months of this year. We expect that the dollar would continue to strengthen against its major crosses as prospects of rate hike will continue to support the greenback on lower levels. The US ten-year yields have also been supported after hawkish but non-committal comments from the Fed chair raised prospects of rate hike. Investors continue to remain on the edge and in the coming month are expected to witness a rocky road with major central banks such as the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan all scheduled to release their policy statement.

India impact of US elections
With less than two months until the US Election Day, India definitely stands out with both the candidates declaring them friends of India. Like most nations around the world, India too will be impacted by the impending changes in the US elections. The US-India relationship has burgeoned under Obama administration as it has matured and reached a stage where changes in personnel will have only limited impact on its trajectory.

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