RUPEE STRENGTHENS EVEN AFTER EASTER TERROR
The rupee’s fortunes have reversed since collapsing 16.4% against the US dollar in 2018. The currency appreciated 3.5% in the first five months of 2019. This was despite the devastating Easter Sunday terror attacks and a long-drawn economic slowdown. There are several not entirely assuring reasons for the appreciation. The currency gained owing to export growth and falling imports due to low consumer demand. As a result, the average monthly trade deficit halved to $500 million. “Strong tourism earnings and a successful sovereign bond issue strengthened the rupee in the quarter, leading to an appreciation of over 3% against the US dollar,” First Capital Research said in a June 2019
In January, First Capital forecast that the rupee would weaken to Rs194 against the US dollar by end-2019. By June, its exchange rate outlook was upgraded to Rs180. There are three reasons for the upgrade.
First, the greenback is expected to weaken against major currencies over concerns of a slowdown in the US, Trump’s trade wars and a possible rate cut by the Fed.
Second, domestic consumer demand will remain subdued. This leads to lower import demand and less pressure on the currency.
The Central Bank reduced policy rates by 50 basis points in May to stimulate growth after the Easter terror attacks. This could weaken the rupee as import demand picks up. However, the recovery will be significantly slower, First Capital says. “We expect demand to normalise by the fourth quarter on possible improvement in sentiment with the announcement of the Presidential Election”.
Third, the Central Bank is building reserves to comfortable levels, equivalent to four months of imports. It’s also raising cash to meet the government’s foreign debt repayment commitments. In June, the Central Bank raised $2 billion from a sovereign bond issue and has the approval to raise a further $2 billion towards year-end. “If successful, the foreign reserve position could be maintained at a reasonably comfortable level, which we believe is $6.5 billion, considering the prevailing environment,” First Capital said.