Will rupee really depreciate towards 80 in next six months?

A lot of buzz is surrounding around the next course of the rupee. Whether rupee will touch 80-mark or not? Despite the adverse events in the country in the form of the coronavirus outbreak and other geopolitical stress, it didn’t impact rupee adversely. From the beginning of April 2020 till now, the dollar-rupee rate remained broadly in its confined range of 75.00-76.20 levels even when the Asian peers had shown some dramatic depreciation in March and April. Does this mean, there is further room for depreciation and rupee could make its move towards 80 in the next 6 to 8 months? Let’s understand it with the help of below mention factors:

Rupee’s timeliness to break all-time low: In our previous report we had explained whenever the rupee has gained from its all-time low for more than two weeks; the trend has remained intact and it trades on a stable to stronger note for a longer time. Also, it takes considerable time to break the previous low. Currently, the rupee has been trading above than its all-time low of 76.91 for around 2 months, reconfirming its historical behavior.

Current Account Surplus: There has been an increased possibility of a current-account surplus in the June quarter as imports have fallen faster than exports. Currently, low oil prices are supporting India’s terms of trade, and a bigger impact on the current account will come from reduced demand for both oil and non-oil imports. The surplus could be nearly 1 percent of GDP for the first time since 2004.

Narrowing of trade deficit: India’s trade deficit narrowed sharply to $3.15 billion in May 2020 from $15.36 billion in the same month last year. India’s current stance to reduce import dependency on China shall further help to bring down the deficit and encouraging domestic manufacturing. India’s trade deficit with China is estimated to have narrowed to $48.7 billion during the last financial year the lowest in five years compared with $53.6 billion a year ago as imports from across the border dropped over 7 percent to $65 billion in 2019-20.

RBI taking Forex reserves to new highs: RBI’s has been accumulating reserves in a heavy quantum every week and has taken it near the all-time high levels. Heavy forex kitty helps the central bank to protect any erratic depreciation in the rupee arising out of geopolitical stress, negative GDP growth, rise in unemployment, and other dull economic data. As witnessed in the last week’s data, with Reserves of about $507 billion, RBI sold near $2 billion and prevented any sharp depreciation beyond 76.20-30 levels in the preceding week.

Other EM currencies recovering from their lows: The Indian rupee has remained the worst performing currency so far and has depreciated by around 6 percent. It is the only Asian currency to have weakened against the dollar this quarter even as its peers have rebounded sharply from the virus-lead selloff seen earlier. However, prospects of foreign inflows lead by Reliance coupled with a slight improvement in India’s services sector and trade data in May shall allow the rupee to join the recovery seen in emerging markets.

However, following Black Swan events can be an exception and keep any gains in check:

India-China: Like COVID-19 pandemic proved to be a black swan event for global stock markets as no one had ever expected that this pandemic will have a devastating impact on the economies world over; an escalation in the India- China tensions could also prove to be an exception to the above thesis and build pressure on the rupee.

US-China: Both countries are previewing sharper confrontation on political, economic, and security issues. Escalation of friction between the two in some form or the other could again take the world economy by toss and might lead to some unexpected fall in rupee in line with the Asian peers.

Outlook:

Overall, considering the above scenario, in the next six months, there is a minimal of 5-10 percent possibility that the pair will move towards 80. On the contrary, the rupee is likely to switch on a recovery mode and there is a 70-80 percent possibility that the currency will appreciate near around 74.50 levels within the next 6 to 8 months’ time frame.

Strategy:

Strategy for Export: Exporters can book near 75.90-76.20 and take advantage of the carry trade. They can book 75-70 percent against actual orders and 35 percent in anticipation of orders around the given levels.

Strategy for Imports: Importers can buy their near term payments falling in 10-15 days around 75.30-75.40 levels. To heading for the entire month, it is advisable to buy on dip close to 75.00-75.20 levels.

-Amit Pabari is managing director of CR Forex Advisors. The views expressed are personal.