Experts predict volatility in Indian rupee likely to persist in short term

The dollar index is at a two-decade high, reflecting the ongoing interest rate hikes by US Fed and the continuing geo-political risks. Suman Chowdhury, Chief Analytical Officer, Acuite Ratings & Research, said: “Along with the expanded trade and current account deficit, such an environment has kept the pressure on the rupee which continues to hover around 80. While the FII outflows have been arrested, the uncertainty on capital flows and the volatility in rupee are likely to persist in the short term.”

Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares and Stock Brokers, said from Rs73 per dollar in April 2021, recently rupee moved below Rs80 per dollar. Depreciation of rupee by 6 per cent against dollar in the last 12 months is one of the lowest among the major countries (both developed and emerging market) leading to appreciation of rupee against most other currencies.

Within the EM Asia equities, Indonesia, South Korea, and India have historically shown the highest negative sensitivity to USD strength. Sectorally for India, real estate and financials have typically been the most negatively impacted, while Healthcare has witnessed the softest hit, Emkay Global Financial Services said in a note.

With the INR being a near-outlier in the Asia FX fall, the FX intervention strategy for the RBI will need to be revisited. The emerging bilateral imbalances (sharply depreciating) against the CNY should not become too accentuated, it said.

“We believe RBI will eventually let the exchange rate adjust to new realities, albeit in an orderly manner, letting it act as an automatic macro stabiliser to the policy reaction function. We see the INR hitting a low of 82 against the USD, before reverting to the sub-79 range,” the report said.

Pankaj Pathak, Fund Manager- Fixed Income, Quantum Mutual Fund said at the Jackson Hole symposium, US Fed Chairman Jerome Powell delivered a hawkish speech suggesting rate hikes will continue and higher rates will be maintained for long period.

Powell’s speech was a big pushback to the part of the market which was pricing for a rate cut by the Fed on the first sign of economic weakness. Market expectations of terminal US Fed Fund rate moved up to 4 per cent vs 3.5 per cent a fortnight back.

Similar hawkishness can be seen in the commentary from other central banks in that part of the world including the European Central Bank, Bank of Canada, and Bank of England. All are hiking their respective policy rates at a pace of 50-75 basis points every meeting.

Pathak said this is not a conducive environment for foreign investors to invest in emerging economies. “Thus, we do not expect large inflows from foreign investors immediately even if India gets inducted into the global bond indices though it would be sentiment positive for the domestic investors and might extend the bond rally for some more time.”