What is the outlook on the rupee this year?
Analysts say fundamentals will aid the rupee this year. According to analysts at Standard Chartered Bank, the rupee will have enough support over the next 6-12 months. “Attractive real yields (net of inflation), growth momentum and robust FX reserves of $394 billion and dollar stabilization” are likely to be positive for the rupee, while “lower global growth and trade will eventually impact the US economy and asset markets, causing the US Federal Reserve to slow the pace of rate hikes”, the analysts said. The dollar is expected to stabilize as interest rate differentials between the US and the rest of the world peak.
How did it perform last year?
The rupee performed the worst among Asian currencies in eight years and was down 8.46% in 2018. In 2011, it was down 15.8%. The US Federal Reserve's interest rate hikes and a robust US economy strengthened the Dollar Index in 2018, leading to a breakdown in emerging market currencies, including the rupee, which reached a record low of ₹74.48 against the greenback on 11 October. Between 2011 and 2018, the rupee depreciated 36% and has been weakening every year, except in 2017. It appreciated nearly 6.34% in 2017, the biggest yearly jump since 2007. Bond yields and rupee move in opposite directions.
What caused the pain?
The sharp fall in the rupee, combined with high crude prices, led to concerns about high inflation and fiscal and current account deficits. However, a plunge in crude prices helped it gain some lost ground.
Graphic: Vipul Sharma/Mint
How did other currencies fare?
The rupee's decline was largely in line with the trend across emerging market (EM) currencies. Most of them depreciated between 2011 and 2018. The rupiah fell around 38%, the yen 26.64%, the ringgit 25.48% and the peso 16.7%. The baht (down 7.64%) and the Taiwanese dollar (down 4.43%) weakened the least. The yuan, which is closely managed, is excluded from comparison. Over the eight years, the Dollar Index, which measures the dollar against a basket of trade weighted currencies, has gained 22.4%.
Which factors are key for the rupee in 2019?
The US-China trade spat and Brexit developments might hamper the outlook for Asian forex as well as global forex pace and risk sentiment, said Sajal Gupta, head, forex and rates, Edelweiss Securities. The rupee is not likely to be insulated and will follow EM forex in this regard. Fed policy, crude price movement, policy stance by the Reserve Bank of India, the government's borrowing programme, inflation trajectory and the results of the Lok Sabha polls will be important indicators for the rupee and bond markets.