The rupee has been very stable in the past 18 months moving between 72.25 to 75.75 about 70 percent of the time, with RBI doing a great job of increasing Foreign Exchange reserves by buying dollars and ensuring that rupee does not depreciate big time to drive away Foreign Investors.

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Given below is a deliberation on the movement of rupee in the past and next three months:

How did rupee behave in the last three months?

Dollar rupee has been in the range of 72.92 to 75.66 in the past three month. The dollar was biddish in the past two months due to the following reasons:

1. Oil moved up from $ 68 to $ 86 and India has been one of the biggest oil consumer in the world.

2. Demand from oil companies particularly ONGC, RIL and BPCL to cope up with the busy season and Festival Demand.

3. Coal and Gas prices moved higher and as there was a shortfall of coal in the world and the Government wanted to ensure that there was no shortfall of Petrol and Diesel.

4. Oil was cheaper than coal and gas and therefore was more in demand.

5. Supply of dollars came down a bit as FED had indicated that they would start the tapering of their bond buying programe from November and complete it by Mid of 2022.

6. There were hardly any inflows for IPOs as number of new issues had dwindled in October-2021.

7. As the festival seasoned commenced and a slate of IPOs like that of Nykka, Policy Bazaar and PayTM, the flows commenced again and Rupee after making a low of 75.66 recovered and closed at 74.37 on 16th of November-2021.

Important events on November 3,4 and 5

On 3rd the Fed in its meeting decided on the tapering issue and announced that it would begin asset tapering in November to the tune of $ 15 billion. On interest rates the Fed Chairman Jerome Powell added that the Central Bank would be “patient” on the timetable for interest rate hike. The market had already factored in the tapering and since the amount of tapering was as per the expectations of the market therefore the market did not react adversely as it did in 2013.

On 4th the BOE decided that it would not be raising the interest rates. The sterling fell sharply following the announcement. The Bank also continued the existing programme of UK Government of bond purchases at a target stock of Pound 875 billion.

On 4th OPEC decided to rebuff a call of US to accelerate output increases even as demand nears pre-pandemic levels. Brent Crude rose $ 2.20 to settle at $ 82.74 per barrel. The OPEC and Russia largely stuck to a plan to raise oil output by 400,000 barrels per day from December.

China’s Forex Reserve rose in October-21 for the first time since July by 0.53% from a month earlier to $ 3.218 billion. Despite the recurring Covid-19 pandemic and uncertainties amongst global economic recovery China’s economy continues to recover with strong resilience and huge potential.

The US trade deficit hit a record of $ 80.9 billion in September which is an all-time high the previous being $ 73.2 billion in June. The American exports fell sharply while imports rose even with supply chain problems at American Ports. The trade deficit with China rose to $ 41 billion.

The United States added 531000 jobs in October and the unemployment rate fell slightly to 4.6 percent. Hiring figures for September were also revised higher from 194000 to 312000 and that of August from 366000 to 483000. The 4.9 percent growth in averaging earnings over the past year however, doesn’t outpace Annual Inflation which was running at 5.4 percent in September.

The US CPI rose by 0.9 percent on month to month basis taking dollar index higher to 95.50 as prospects of any rise in interest rates in Euro Zone and UK dwindled.

Prospects for the next three months

It being a busy season the flows to continue as a number of companies have applied for IPOs to SEBI and the flows should continue in the next 3 months. Upticks can be possible if RBI protects 73.80 and 74.00 levels and oil companies continue to buy $ for hedging their payables. However, we do not expect rupee to fall too much from here towards levels of 77. The Range continues to be between 73 to 75.80. RBI has ensured that exporters and importers both get a chance for hedging their receivables and paybles respectively.

On every alternate month the rupee shows lows and highs. Currently rupee is at levels of 74.37 while 74.10 seems to be a good support for the dollar and therefore the imports should get hedged. The effect of tapering has been fully factored in by the market while interest rate hikes seem to be a bit far off for now. Oil is the only concern for now which could affect our CAD and trade deficit but a lower $ rupee should counter the effect partly.

The LIC IPO is a bit far away in March-2022. BPCL divestment also may happen in 2022 only. Meanwhile exporters should hedge all upticks towards 75 levels for a longer term while importers can hedge their near term up to December-21 at levels between 73.80 to 74.15. Overall, the rupee is going to be in a range which it has been in past 18 months and this should be adhered to by buying $ at the lower end of the range and selling dollars at the higher end of the range.

The author, Anil Kumar Bhansali, is Head of Treasury at Finrex Treasury Advisors. The views expressed are personal

First Published:Nov 29, 2021 5:58 PM IST