USDINR Spot is now trading at 74.07
USD/INR, EUR/INR, GBP/INR Rate and Performance table
|1 YR % CHG||2 YR % CHG||3 YR % CHG|
Trade and Capital flow statistics:
|2017-18||2018-19||2019- Till date|
|Trade deficit||-160 bn||-180 bn||-133 bn|
|CAD||-48 bn||-57 bn||-25 bn|
|CAD as % GDP||-1.8%||-2.1%|
|NET INVESTMENT( USD)||52 bn||30 bn||35 bn (apprx)|
Brent Crude price table
|2020 (Mar 9 th)||34 USD|
Important developments since 2018 April:
-Indian Rupee has declined 13% in last two years and approx. 7% in last 1 year. In 2018-2019, Rupee decline could be attributed to widening of CAD and spike in Crude prices to USD 85 in Oct 2018.
-Rupee hit 74.45 in Oct 2018 and then retraced to 68.35 as Crude prices softened and FII inflows returned.
-Indian FX reserves has swelled from USD 370 bn to USD 476 bn in the last 3 years.
-India continued to be a top FDI destination and is in the first top 10 destinations for FDI.
-Indian Rupee remains sensitive to Crude prices and EM Currencies performance against USD.
-Indian GDP has declined to 4.7% in Q3 and it is now estimated that full year GDP will be around 5%.
-RBI slashed interest rates by 135 bps and banks have transmitted 55 bps to end clients for lending.
-Exports growth is flat to mildly negative due to poor external demand.
-Inflation has spiked above 7.5% in Jan, forcing RBI to be in pause mode.
-Indian banking system continues to be under stress and NBFC’S are in precarious condition due to tightening of lending norms.
-Slash in corporate tax and relief in individual taxes is yet to transform into investment and consumption increase.
Global developments in last 2 years:
-US-China trade friction has hit global growth and investment.
-Brexit issue rocked UK and EU and dragged growth.
-Fed increased rates till mid 2019 and then has been forced to roll back due to US-China issues and Corona virus impact.
-US economy is still in solid growth mode. Expect 2.3% GDP growth.
-IMF has cut global GDP growth to 2.9% due to Corona virus impact. China may grow by around 4.5%. Japan is in deep contraction and EU will have flat growth.
-EURO interest rates are in deep negative zone with QE.
-Global Equities have slumped in last one month.
-Crude has declined very steeply as there was no agreement between OPEC and Russia on production cut. Saudi Arabia has announced increase in production and slash in prices by USD6 to USD 8 per barrel.
-Global growth and financial markets are under extreme pressure. Considering the low interest rates in Developed economies, fiscal stimulus is the expected remedy along with hopes of virus containment.
-EURO has jumped to 1.14 against USD due to unwinding of carry trades. If USD interest rates are cut further, Euro could rise further.
Till Feb end, India was considered safe from corona virus impact. Due to new cases, India has lost the safe haven edge and that has put pressure on Rupee. However, steep fall in Crude should reduce CAD and lower inflation in coming months. With CNY gaining 2% in last one month, Rupee’s decline is stretched for the present. RBI’S FX reserves of USD 476 bn is a tool to contain Rupee weakness. However, RBI has not shown great resolve till now. RBI was buying USD till Feb month to stem Rupee gains below 71 and this helped in FX accretion further.
Considering the Global fear psychosis at present, there could be no rational/logic advanced to explain market movement. Fear factor should subside to bring clarity to views.
However, back testing of spot movement over the years indicate a very high statistical probability of Rupee declining to 78 levels this year. This is yet to be backed by fundamental developments. If any fiscal stimulus measures are announced, leading to higher deficit, Rupee could hit 78.
EUR/USD has gained over 5% in last few sessions due to deep rate cut by Fed. Fed has brought down interest rates by 50 bps to 1%. Market is pricing another 50 bps cut in the next few months. Rally in EUR/USD is due to unwinding of carry trades with fwd premia shrinking. This should give a floor to EUR/USD fall at around 1.10 levels. We could expect a higher average exch rate for both USDINR and EURINR pair this year. EUR/USD will top out only when US interest rate cut bottoms out. Expect EUR/USD to trade in the 1.10-1.17 range. Only a fall below 1.10 will change the bullish view. Expect 71.50 to be a floor to Rupee gains. EURINR could have a floor in the 82-80.50 range.
Suggestions: 1) USD IMPORTS should be covered for 3 months or even 6 months on dips to 72.
2) EURINR Imports should be covered for qty greater than accounted exposures on decline to 82-80.50.
3) Eur exports could be covered once global factors stabilize. GBP exports should be covered gradually, not exceeding accounted exposures.