As I had written in one of my previous articles titled “Is it time to go underweight on technology” I believe that the Indian Rupee is looking to appreciate significantly over the US dollar over the next few months. It has already appreciated by nearly 5% over the last one month itself.
Over the last few months the India rupee has remained week against the US Dollar and has underperformed most of the other emerging market currencies by a wide margin. The Indian rupee still trades at around Rs 47 to the dollar vis a vis its lows of Rs 39 to the dollar in the first quarter of 2008. As against and appreciation of just around 6-7% of the rupee the Korean Won ahas appreciated by 25% plus in the same time, The Indonesian Rupiah by nearly 30% and the Brazilian Real by nearly 35% etc.
I believe that the Indian rupee which has been reasonably stable in a scenario where the US Dollar has continuously lost value against most currencies and the US Dollar Index is down 15% from its peak of mid March 2009 is set to begin an appreciation cycle which should average 4-5% (at least) per year over the next two years. The reasons why the rupee has not appreciated in the near term despite an inflow of USD 12 billion in portfolio flows since March,continuously falling trade deficit, strong equity fund raising, strong remittances flow etc has largely ( in my view) due to RBI keeping a tight leash on the Rupee due to the pressure on export industries which have been severely hit by the global slowdown. Also given the fact that inflation has been on a negative territory there was no incentive to let the rupee appreciate in order to control inflation.
Going forward given the fact that inflows into India are likely to remain strong and also the fact that inflation is likely to pick up over the next few months there is an increased likelihood that the RBI will let go of the rupee and we will see a steady appreciation. This will also be supported by an overall recovery in the global economy which is already leading to some sort of uptick in exports of traditional labour intensive products.
We have also recently heard of lot of noise coming from the Indian Government as well as RBI on the need to control inflation and the fact that India might be among the first few countries to abandon the easy monetary policy. This is also likely to be a self fulling prophesy for the appreciation of the Rupee as most of the Western Central banks have clearly indicated that they are likely to keep rates low for a prolonged period of time. Just the expectation of rate hike will lead to rupee appreciation.
Going forward given the fact that inflows into India are likely to remain strong and also the fact that inflation is likely to pick up over the next few months there is an increased likelihood that the RBI will let go of the rupee and we will see a steady appreciation. This will also be supported by an overall recovery in the global economy which is already leading to some sort of uptick in exports of traditional labour intensive products.
We have also recently heard of lot of noise coming from the Indian Government as well as RBI on the need to control inflation and the fact that India might be among the first few countries to abandon the easy monetary policy. This is also likely to be a self fulling prophesy for the appreciation of the Rupee as most of the Western Central banks have clearly indicated that they are likely to keep rates low for a prolonged period of time. Just the expectation of rate hike will lead to rupee appreciation.
That was the fundamental view. Even technically the USD has made a very negative pattern against the Rupee both on the weekly and daily charts. Whereas on the daily charts it has made a double top on weekly charts it is on the verge of completing a head and shoulder pattern that should result in the rupee moving to a level of Rs 44.5-45.25 by March 2010.
I believe that the appreciation of the rupee will be positive for the economy as it will reduce inflationary pressures to an extent and also reduce costs of both inputs as well as borrowing for India Inc. However it might hurt some export industries as a fast appreciation of around 10% will be difficult to adjust given that external demand is still pretty week.
“Faith in your own abilities and confidence in your individual methods are essential to success”