Is the dollar-rupee pair looking for a breakout above 73.30?

You will be amazed to know that the word Rupee is derived from the Sanskrit word “Rupya,” which means “molded silver”. It is the common currency with some variation in the name for India, Maldives, Mauritius, Indonesia, Nepal, Pakistan, and Sri Lanka and it is the former currency for many gulf countries. Around 26 percent or 2 billion out of 7.5 billion world population use ‘Rupee’ as a currency. The deep history will surely make you feel proud. Now it’s time to discuss present factors which will shape the Rupee’s future. Let’s check whether heads (positive factors) or tails (Negative factors) shall lead the momentums.

Rupee Tails (Negative Factors):

RBI sees falling growth and rising inflation

The RBI in their recent bi-monthly monetary policy on 4th June revised their inflation higher & growth lower. They said that currently it is being influenced primarily by supply-side factors rather than any demand pull. It is quite possible that manufacturers have not yet considered higher input costs in fear of losing market share in the current environment, but once demand firms up then that cost will be passed on to the consumer and we could see a higher CPI print. The Southward revision in growth was on account of state-wide lock in April and May month which has hampered business, manufacturing and services activity. In the upcoming time, it is expected that inflation pressure will be further built upon RBI and growth could remain sluggish as business resumption to normal level will take time.

RBI’s restructuring loan is negative for the banking sector

To set off revision in inflation and growth, RBI took extra measures by doubling the loan restructuring window of upto Rs. 50 crore. Loan restructuring enables a larger set of borrowers which include MSMEs, non-MSME, and small business individuals to avail of the benefits under Resolution Framework 2.0. This is a relief for the stressed borrower. But on another side, this will add further pressure on the banking book as extra leeway to the borrower is an opportunity cost for the bank. It could be negative for the financial sectors and so for Rupee.

Crude oil at a 3-year high, an add-on to inflationary pressure

This week, the oil prices were seen trading near Oct-2018 highs amid optimism about global demand and OPEC’s stance to continue with a gradual production hike. India being the world’s third-largest oil consumer meets more than 84 percent of its oil needs through imports. As we know that every $1 rise in crude oil prices increases the import bill by $0.13 billion. And every $10 jump in prices brings down GDP by 0.2-0.3 percent and worsens the Current account deficit by $9-10 billion. So, it is obvious that a rise in oil prices on the expectation of returning demand on easing lockdown will hurt the local currency.

The expectation of a rise in US real yield and DXY

After a higher vaccination drive and reopening, the US economy is expected to outperform its peers like the UK and Europe. The recently released job report suggests that the unemployment rate fell to 5.8 percent along with the addition of 559K job, however, it fell short of expectations. Though US president Joe Biden is quite optimistic about the job market and his infrastructure spending & tax plan worth $4 trillion will push more jobs in the upcoming time. The Fed, which has recently started overnight reverse repo and pulled-off liquidity from the market has already hinted at tapering- just like they had in 2013 before tapering. If Fed throws some tapering clue in the upcoming 16th June meeting then DXY could move higher towards 91-91.50 levels.

Rupee heads (Positive factors):

Returning of FII/FPI flows in the market

In just 5 trading sessions of June month, FIIs have invested over Rs. 9,500 crore in equity markets. After withdrawing investment in the first half of May, FIIs reversed their stance in the middle of May as the market started pricing in business normalcy amid the expectation of gradual lifting of restrictions in June. The famous phenomenon of return anomaly “Sell in May and go away” got overruled as strong recovery helped Nifty to make a Lifetime high and gain almost 6.5 percent. Further, MSCI & FTSE rebalancing flows tilted foreign flows in bullish territory. If flows remain intact then this could be positive for the Rupee.

Easing COVID situation and so restrictions

After stricter restrictions in April and May month, the results paid off in June as India reported 86,498 new daily Covid-19 cases- the lowest in 66 days. The easing fresh cases and drop in positivity rate helped many states to come up with phase-wise reopening. This will surely ramp Industrial activity and demand is also expected to return to the market. On the vaccination front, the center’s announcement of free covid vaccination for all above age 18 will surely increase the vaccination rate. Currently, we are seeing that higher vaccinated countries have an extra edge over other countries and so for currency. But for India with a large population to achieve a target will be like South Africa’s win over Australia after chasing the highest ever score of 435 runs in the 2006 match.

Outlook:

Overall, we are expecting that Rupee-negatives such as rising inflationary pressure on supply disruption, higher crude oil prices and likely Fed’s turning hawkish will dominate over Rupee-positives like FII flows and easing the covid situation. Further, RBI’s recent spot buying curb losses in the pair beyond 72.30 levels. The selling pressure in the forward market due to the unwinding of RBI’s position will surely attract importers; especially oil importers to cover extra where they wanted to take benefit in currency to offset the impact of higher oil prices. Over the short term with 15 days to 1-month perspective, we expect that the dollar-rupee pair should remain well above its support zone of 72.30-50 and could bounce towards 73.20-30 levels. And over the medium term, we expect the pair to regain its momentum beyond 73.20-30 and test 74.00 -74.50 levels.

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