Where is Rupee moving in 2018??

The numbers speak for themselves. The INR-US$ figure stood at 68.145 on 2-Jan-2017, and closed the year at 63.84 in Dec-2017, up 6.3%. On the flip side, it depreciated 2.1% till date in CY 2018, starting the year at 63.68 on 1-Jan-2018, and touching 65.025 as on 25-Mar-2018.

A significant contributor to the strengthening of the rupee in 2017 was strong foreign inflows in the country’s financial markets. This resulted in the need for foreign investors to convert dollars to rupees to buy stocks in India, which, in turn, led to in an increase in demand for the Indian currency. Net inflows into the equity market in CY17 stood at Rs 52,224cr, and Rs 1,48,533cr in the debt market.

“India was a beneficiary of flows into equity markets in 2017, initially from abroad, and later from domestic sources. This led to the Rupee appreciating smartly in 2017.

Circa 2018

On the flip side, the picture in 2018 looks bleak as of now. The Rupee has depreciated 2.1% as of 25-Mar-2018 from the start of the year. Though the Rupee’s short-term strengthening against the dollar early this year came as a breather, the reasons for this were more to do with negatives in the US economy, rather than positive domestic triggers.  Given that, the domestic currency’s journey in 2018 doesn’t inspire confidence.

Stubbornly high levels of NPAs in banks despite undertaking corrective action, a surge in the current account deficit and fiscal deficit, unearthing of frauds in Indian banks, and a rate hike by the US Fed have been the main triggers responsible for the rupee’s weakness this year.

FIIs have become net sellers in the debt markets selling debt papers of 1663.48cr so far in 2018.

To add to the mayhem, the Trump administration has stated that it will impose tariffs of 25% on imported steel and 10% on imported aluminium.  India could indirectly get impacted if the tariff war escalates, as its exports’ momentum generally, and for metals in particular could be impacted. The country’s metal exports have witnessed a sharp surge in the last few years. While total exports grew 5% in FY17, iron and steel exports rose 58%, and aluminium and associated articles recorded an increase of 23%. This is expected to continue going ahead, as domestic consumption has not increased in spite of an increase in domestic output, owing to capacity expansion.

Looking at macros

Macro economical data that has come in till date does not paint a pretty picture either.  Higher expenditure has resulted in India's fiscal deficit touching Rs 6.77lakh cr at the end of January this year. This is 113.7% of the target for the entire fiscal. 

 “The macros picture for India has steadily deteriorated since end 2017. Trade and current account deficit has widened because of inelastic imports, while exports have grown at a slower pace. The domestic political situation has deteriorated ahead of the spate of state elections, and the general elections in early 2019. Rising interest rates abroad, high valuation relative to corporate earnings growth  are reducing the lure of Indian equities for overseas investors, who have chosen to take some profits out of India. If this situation persists, then we could see the Rupee coming under increasing pressure going forward,”

Though it seems like a period of ‘wait and watch’ of the unravelling of events and data that would impact the Indian currency’s journey in 2018, the chances of its appreciation seem to be slim.