Rupee to tumble beyond 60? Unlikely
INR depreciated sharply in latter half of May’13 and has continued to remain under pressure. Widening trade deficit
coupled with no respite from the capital inflows has pressurized the currency since May’13. Sharp spike in gold imports
in Apr‐May’13 with weaker exports is one of the main reasons for dwindling of the exchange rate. On anticipation of
ban in gold imports, banks imported significant portion of gold in May’13. Even after sharp INR depreciation of nearly
10.8% since the beginning of May’13, we do not expect any quick recovery in export growth as the growth is more a
function of global demand than currency driven. However, due to sticky nature of aggregate imports, we expect the
import bill to turn costlier and trade gap to widen further.
Currency in Real terms (based on REER 36 Trade weighted 04‐05 series) has depreciated by only 6.9% since the
beginning of the series while in Nominal terms the depreciation has been quite stark at 13.8%. The gap between the two
series is the sharpest gap observed in the entire series. Stagnation in real net inflow of foreign currency assets is the key
reason for rupee depreciation and we can see a new base of INR 56 for FY14. Delay in augmenting stable FX resource
will push rupee to newer lows. FX reserves have declined sharply by USD 26.7bn since 2008. Depleting foreign exchange
reserves have adversely impacted domestic liquidity. This leaves limited room for RBI to intervene and stall the sharp
depreciation of the currency.
Nearly 50% of the CAD financing in Apr‐Dec’12 was through the route of FII inflows. Since reversal of these inflows
can be immediate it augmented the sensitivity of the currency to the global events. Trimming of Fed stimulus package
by the year end has considerably narrowed down the interest rate differential between US and Indian bonds. However,
the rate differential is still large as compared to earlier years. This has triggered major reversals in FII debt investment
and other Interest sensitive instruments.
Our View:
Depreciation in rupee is likely to trigger imported inflation risks. Some of the food items such as pulses and oil seeds;
power & fuel items and precious metals & fertilizers are likely to see upward swing in prices. Adverse impact on
petroleum subsidies is also likely; as with every depreciation in rupee under recoveries increases by INR 75‐80 bn. So
depreciation of INR 5 has augmented the under recovery by INR 300 bn.
Immediate requirement for attracting sustainable long term inflows to finance CAD is necessary to mellow down the
volatility in the rupee. We do not expect government to raise reserves through NRI bonds as the spreads have corrected
sharply and there has been a huge influx in NRI deposits (high interest rates of 8.75%) in past few years. We can expect
influx in inflows in Real estate. However, we expect currency to remain under pressure as significant portion of CAD is
financed through short term inflows. On the trade deficit front, with join efforts taken from the government and RBI to
tackle the burgeoning gold imports we expect gold imports to remain subdued in the remaining months. Gold imports
on an average are nearly 26.0% of trade deficit lowering of gold imports will have positive impact on CAD. We expect
average INR to be at 56 while we expect INR to remain volatile and range in between 55‐59 in FY14.
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INR depreciated sharply in latter half of May’13 and has continued to remain under pressure. Widening trade deficit
coupled with no respite from the capital inflows has pressurized the currency since May’13. Sharp spike in gold imports
in Apr‐May’13 with weaker exports is one of the main reasons for dwindling of the exchange rate. On anticipation of
ban in gold imports, banks imported significant portion of gold in May’13. Even after sharp INR depreciation of nearly
10.8% since the beginning of May’13, we do not expect any quick recovery in export growth as the growth is more a
function of global demand than currency driven. However, due to sticky nature of aggregate imports, we expect the
import bill to turn costlier and trade gap to widen further.
Currency in Real terms (based on REER 36 Trade weighted 04‐05 series) has depreciated by only 6.9% since the
beginning of the series while in Nominal terms the depreciation has been quite stark at 13.8%. The gap between the two
series is the sharpest gap observed in the entire series. Stagnation in real net inflow of foreign currency assets is the key
reason for rupee depreciation and we can see a new base of INR 56 for FY14. Delay in augmenting stable FX resource
will push rupee to newer lows. FX reserves have declined sharply by USD 26.7bn since 2008. Depleting foreign exchange
reserves have adversely impacted domestic liquidity. This leaves limited room for RBI to intervene and stall the sharp
depreciation of the currency.
Nearly 50% of the CAD financing in Apr‐Dec’12 was through the route of FII inflows. Since reversal of these inflows
can be immediate it augmented the sensitivity of the currency to the global events. Trimming of Fed stimulus package
by the year end has considerably narrowed down the interest rate differential between US and Indian bonds. However,
the rate differential is still large as compared to earlier years. This has triggered major reversals in FII debt investment
and other Interest sensitive instruments.
Our View:
Depreciation in rupee is likely to trigger imported inflation risks. Some of the food items such as pulses and oil seeds;
power & fuel items and precious metals & fertilizers are likely to see upward swing in prices. Adverse impact on
petroleum subsidies is also likely; as with every depreciation in rupee under recoveries increases by INR 75‐80 bn. So
depreciation of INR 5 has augmented the under recovery by INR 300 bn.
Immediate requirement for attracting sustainable long term inflows to finance CAD is necessary to mellow down the
volatility in the rupee. We do not expect government to raise reserves through NRI bonds as the spreads have corrected
sharply and there has been a huge influx in NRI deposits (high interest rates of 8.75%) in past few years. We can expect
influx in inflows in Real estate. However, we expect currency to remain under pressure as significant portion of CAD is
financed through short term inflows. On the trade deficit front, with join efforts taken from the government and RBI to
tackle the burgeoning gold imports we expect gold imports to remain subdued in the remaining months. Gold imports
on an average are nearly 26.0% of trade deficit lowering of gold imports will have positive impact on CAD. We expect
average INR to be at 56 while we expect INR to remain volatile and range in between 55‐59 in FY14.
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