Mumbai: Indian rupee closed stronger on Monday following gains in its Asian peers, but remained worst performer in Asia for 2018 in eight years.
The currency closed at 69.77 a dollar, up 0.24% from previous close. It opened at 69.79. The 10-year gilt yield closed at 7.369% from its previous close of 7.385%. Bond yields and prices move in opposite directions.
So far this year, the rupee was Asia's biggest depreiciated currency, down nearly 8.46%. Last time the home currency was weakest in Asia in 2011, down by nearly 15.8%. Foreign investors have pulled out over $11 billion from local equity and debt market, year to date.
Domestically, traders expects higher current account deficit due to outflows by foreign investors while and the ruling Bharatiya Janata Party may announce more populist measures to woo voters ahead of general elections next year, after losing assembly elections in Madhya Pradesh, Rajasthan and Chhattisgarh. Eight state governments have waived farm loans worth ₹1.9 trillion since April last year. Since Monday, ₹59,000 crore of waivers have been promised to farmers in Madhya Pradesh, Rajasthan, Chhattisgarh.
Globally, trade war between US and China and fears of slower economic growth also dampened the sentiment.
Since start of 2011 till date, the rupee has depreiciated 36% and has been weakening every year, except 2017. The rupee appreciated nearly 6.34% in 2017, its biggest yearly jump since 2007.
The depreciation in the rupee is more or less in line with the trend across emerging market (EM) currencies. Most EM currencies have depreciated over the eight-year period between 2011 and 2018 end. The Indonesian rupiah, depreciated around 38%, Japanese yen slumped 26.64%, Malaysian ringgit fell 25.48% while the Philippine peso dropped 16.7%. Among Asian EM currencies, excluding China, the Thai baht (down 7.64%) and the Taiwanese dollar (down 4.43%) have seen the least depreciation.
Among the Brics (Brazil, Russia, India, China and South Africa) nations, currencies of Brazil (down 57.32%), South Africa (down 54.60%) and Russia (down 56%) have seen a steep fall. The Chinese currency, which has been closely managed, is excluded from the comparison.
Over these eight years, the Dollar Index, which measures the dollar against a basket of trade weighted currencies, has gained 22.4%. Much of this appreciation came in 2014 and 2015 when the index gained 12.8% and 9.26%, respectively.
Brokerage firm Choice Broking expects that the rupee will be in the range of 70-73 in 2019.
The 10-year government bond yield eased by just 6 basis points in 2018. It rose nearly 70 basis points from January till September but since then it softened by 76 basis points. The bond yields softened since September on back of easing worries of fiscal slippage and lower inflation after decline in crude prices. So far this year, Oil is down 19%. The crude prices are currently down 34% from their 2018 peak of $ 86.29 per barrel seen on 3 October.
Sajal Gupta, Head Forex & Rates, Edelweiss Securities on the outlook of Rupee says “US-China trade spat will continue to linger on Asian FX outlook, while Brexit developments and outcome by March 2019 could add another layer of (un)certainty in global FX space and risk sentiments. INR will not be insulated from any of the global idiosyncrasies and will follow EMFX suit” .
“That said, if markets perceive these risks well and behave sanely, we should see mild dollar weakness in 1HCY19 which should be largely EMFX positive. Separately, INR volatility could emerge ahead of the election-led event risk if opinion polls start hinting at a mixed mandate, and with investors wary on taking heavy INR assets' positioning ahead of the union elections”, Gupta added.
Joseph Thomas, Head Research-Emkay Wealth Management expects that the crude oil, policy stance by the Reserve Bank of India, borrowing programme, inflation trajectory and outcome of general election would be an important indicator for Rupee and bond markets next year.