Rupee sunk further to 69.09 today, making Rupee one of the worst performer in EM Currencies this Year. Rupee has declined 2.4% in June itself. Since this Year low of 63.25, Rupee has declined 9%. As compared to fiscal year close of 65.17, Rupee has declined 5.87%. CAD is now 1.9% of GDP and is set to expand further. It is estimated that every USD 10 increase in Crude prices translate into an increase of CAD by 0.4%. In the last one week itself BRENT crude has rallied over USD 5 to USD 77 now. Capital outlfows is continuing. Equity outflows is around 750 mn USD and debt outflows is around USD 6.25 bn in this calendar Year. RBI’S action in removal of bc through LOU’S has added further pressure due to bunched up payments (past bc’s+ import payments).
Market developments and hedging suggestions
Though Opec agreed to increase production by 1 mbpd, there are jitters as US is putting pressure on allies to stop buying Iranian Crude. Disruption in Libya is also contributing to last week rally in Crude. Saudi Arabia is all set to increase production in July. If US puts pressure on Oil producing nations to stabilise and bring down prices, it may have some effect.
US data is strong. There is an expectation that US June quarter GDP will be closer to or exceed 3%. With unemployment at low levels, inflation pressures are bound to build and keep rate hike expectations up. This is negative for debt inflows into India.
Indonesia and Turkey increased interest rates to rein in Currency fall. Though RBI hiked rate in June, they maintained a neutral stance. Since every USD 10 increase in crude prices increase inflation by 30 to 40 bps, CPI could exceed 5%, bringing more rate hikes befor this Year end. If RBI refrains from rate hike, Rupee fall will happen and can only be checked by intervention.
Having said that, market makes a U-turn when the consensus is for Rupee fall/rise. Since Rupee has declined parabolically, it is unwise to rule out correction targeting 67.50/66.85 in the next few months. Hence, risk is still evenly balanced at this stage for near term imports and exports.
On the Global front, Chinese Yuan was also under pressure. Chinese stock market has fallen over 7% in June. Trade tensions, fear of corporate bond defaults and market fall have all contributed to 3.1% decline in Chinese Currency in June.
Euro and GBP are in the back foot against USD. EUR/USD is closer to important support of 1.15 and a break will take it down to 1.1250. GBP/USD is also near important support of 1.3050. EURINR is floating around 79.75 due to Rupee weakness. GBPINR is now at 90.40.
While USDINR hedging should be done according to cost angle and comfort, prefer EURINR export hedging from now. GBPINR receivables hedging should also be done.