Triggered by both global as well as domestic factors, USD-INR exchange rate has slipped to its multi-year high breaching Rs.71 levels in August 2019. How would the Indian rupee fare in the rest half of 2019 is the pertinent question at this juncture? The article aims to present a detailed analysis multi-year of the expected movement of the rupee against the major currencies of the world in the second half of 2019.
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Top 5 Factors Affecting Rupee Exchange Rate in 2019:
1. US-China Trade War:
This is one of the most important global factors impacting the rupee exchange rate against major foreign currencies. The recent decision of the USA of imposing an additional 10% duty from September 2019, on the import of Chinese goods, has further escalated the trade war with no signs of trade settlement in the coming times.
This would not only negatively affect the global growth scenario but also exert currency depreciation pressure on Yuan and other major Asian currencies, including the Indian Rupee.
2. Crude Oil Prices:
India meets over 80% of its crude oil requirements via import and therefore, any variation in the crude oil prices directly impacts India’s Current Account Deficit (CAD) which thereby affects the rupee exchange rate.
However, the recent set of events such as global economic slowdown and the US-China trade war have led to weakening in demand for crude oil which is expected to further soften the prices. Further, the production cut decision of the Organization of Petroleum Exporting Countries (OPEC) has been negated by an increased supply of US shale oil.
Crude oil prices have been in the range of $60-70 a barrel for quite some time have had an appreciating effect on the rupee exchange rate. If the geopolitical situation in the middle-east region remains stable, crude prices are expected to fall further to $55-60 range with the escalation of the trade war. Any fall in crude oil prices from hereon will have a cushioning effect on the USD-INR exchange rate.
3. Union Budget 2019:
Some of the announcements made in the Budget 2019 are expected to have a lingering effect on the rupee exchange rate. The additional surcharge imposed on Foreign Portfolio Investors (FPIs) who are not registered as companies have led to heavy selling by FPIs in the equity market.
FPIs have already sold over Rs. 11,000 crore in the equity market in the month of July alone. However, the FPI selling witnessed in the equity market could not affect the rupee exchange rate much because FPIs were net buyers in the Indian debt market. If the FPI surcharge issue is not resolved soon and the debt market turns unfavorable to FPIs in terms of net returns, the rupee may come under immense pressure.
Another major announcement was the plan of government borrowing from overseas markets by issuing sovereign bonds. The rationale behind the overseas borrowing plan is to leave some space for borrowing by private players in the domestic market to kickstart the private investment cycle. If the plan gets implemented, it would help the private sector players due to a decrease in their credit cost and avoidance of crowding-out effect.
4. Growth Concerns:
Due to numerous global and domestic factors, India is currently facing multiple headwinds on the growth aspect. RBI in its latest monetary policy has revised the GDP target from 7% to 6.9% for FY 2019-20.
source: tradingeconomics (dot)com
With the banking sector continuing to be under pressure due to the Non-Performing Asset (NPA) issues, the NBFC sector struggling through the liquidity crisis, auto and consumption sectors witnessing significant slowdown and production cuts are imposing a great challenge to the GDP growth rate and making FPIs really worried. The apparent slowdown in the Indian GDP will also exert pressure on the USD rate.
As per the latest update, the GDP growth rate for July-September Quarter, Q2-Fy 2019-20, has slowed down to 4.5%, a six year low. This may act as an overhang on FII inflows which would create additional pressure on the rupee. However, as per the experts, the GDP has more or less bottomed out and should consolidate in the next two quarters with the sign of revival of economic activity.
5. Easy Monetary Policy:
With global growth slowing down, central banks across the countries have switched to monetary easing which is expected to continue in the second half of 2019. Indian central bank being no exception is also expected to have a dovish stance on the monetary policy front which may get reflected in multiple policy rate cuts and other measures to improve the liquidity situation.
As inflation numbers have been under control so far in 2019 and Monsoon being near to normal, RBI is expected to push for growth by adopting a soft monetary policy in the second half. Since the net interest rate differential is expected to remain more or less same, FPI inflows are expected to be the same on the count of interest rate sensitivity. This would have a strengthening effect on the USD–INR exchange rate.
Rupee Forecast for July-September 2019
- In addition to the factors mentioned above, the introduction and passage of Kashmir Reorganization Bill, which has scrapped the special status to J&K by abrogating Article 370 and Article 35A, has created political uncertainty, security issues and threats of violence and backlash in Kashmir which is expected to have a dampening effect on the rupee exchange rate.
- Official devaluation of Chinese Yuan has raised the possibility of currency war initiated by China to counter US trade war tactics. This would have lead to further weakening of the rupee and other Asian currencies against the US dollar.
- Rupee slid to the levels of Rs. 71 against the US dollar in August raising fresh speculations in the market about its future trajectory.
- Rupee is expected to be range-bound in July to September (Q2, FY20) time period with a limited scope of strengthening. The rupee is likely to be in the range of 69.80 to 71.40 in this time frame.
Rupee Forecast for October-December 2019
- As per the announcement made by the finance secretary, the government-led overseas borrowing can be implemented anywhere in this time frame and would be initially limited to $10 Bn. While the borrowing amount is not large enough to initiate appreciation of the rupee, if implemented it would certainly ease out the downward pressure on the rupee-dollar exchange rate.
- The borrowing cost should significantly come down with continuous RBI policy rate cuts. With the festival season kicking in the market, domestic demand is expected to pick up which will address some of the growth concerns.
- Much will depend on the outcome of US-China talks also. If the threat of a full-fledged trade war gets mitigated due to successful talks between the two countries it would strengthen the rupee significantly against the US dollar. However, if the talks get derailed or further escalation of trade war happens, the possibility of further weakening of the rupee can not be ruled out.
- The global trade scenario is expected to improve in the time period. With the festive season kicking in at this time in India, domestic demand is also expected to pick up which would help in strengthening effect on the rupee. The rupee is likely to be in a range of 69.20-71.35 against the US dollar for the September-December, 2019 time period.
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