USD ruled in 2018, advancing against majors and EM Currencies. The year ended on a volatile note with Global Equities, Crude and Yields melting down. Most of the assets ended in negative Zone. Indian Equity indices outperformed with a 3% gain y/y.

The year was dominated by 1)Global trade issues 2) Crude Oil’s rise and fall, 3) Rise and fall of Global Equities and Yields, 4) Brexit uncertainty 5) Four rate hikes by Fed, 6) Robust US economic data.

US growth spurred by fiscal stimulus and strong employment overshadowed trade issues to support asset markets till Nov 2018. However, Fed’s rate hike path for 2019 has spooked markets. Markets fear that excessive rate tightening may lead to recession in 2019/2020. The early warning sign has been flashed by sliding US yields with 2-10 Year curve flattening. If inversion happens and sustains, it could bode bearish signals for future prospects. EURO started the year on a bright note climbing to 1.25+ levels. However, US growth and Fed hike brought Euro down to 1.12 levels. Brexit uncertainty has dampened Pound’s prospects. Slowdown in Chinese and German growth have raised fears of fall in Global GDP. IMF and World bank have started to downgrade Global economic growth.

Brent Crude rallied to USD 85 despite weak fundamentals. US action in exempting 8 countries from Iranian sanction and high Crude inventories triggered steep fall in Crude. OPEC is likely to implement further production cuts. However, weaker than expected Global growth and unfavorable demand-supply equation may cap Crude gains.

Rupee declined to 74.45 in mid Oct from around 63.25 levels. Rupee movement was closely correlated to Oil prices as trade deficit expanded. CAD was edging closer to 2.8%. However, significant drop in Crude is expected to bridge CAD significantly. FII inflows returned in Nov after heavy pullouts in Apr-Oct period. On a cumulative basis, FII’S sold Rupees 23769 Cr of Indian Equities and  Rupees 51328 Cr of Indian debt in 2018 calendar Year. FII inflows in Nov/Dec and drop in Crude prices helped Rupee to recover to 69.77 on Dec 31 st 2018.

Indian Equity indices gained 3% despite 1)Liquidity deficit, 2) IL&FS issues, 3) Global trade issues, 4)Impact of weak Rupee and volatile Crude prices, 5)Resignation of Mr Patel as RBI Governor. Indian Economy continued to show resilience with a projected GDP growth of 7.5-7.6% in 2018-2019 amidst low inflation of around 3%. GST collections have stabilised in the 95,000 Cr/month range. Govt has continued to rationalize GST taxation system and is expected to lower duty slabs further.

Issues for 2019: 1) Resolution of US-China trade spat, 2) Resolution to Brexit uncertainty, 3) Fed’s interest rate hike cycle, 4) OPEC’S decision on production cut, 5) Pre election budget and 6) Indian General election in May.                                                                      

Fundamentally, USD rally against majors may not continue and USD could even decline as Fed will end rate hike cycle at the earliest. This should be supportive for Rupee. Softer Global growth (instead of recession) with moderate inflation and stop in monetary tightening could be a possible outcome in 2019. This should help Rupee to stabilize. Considering that RBI has sold USD from reserves in the period till Oct in 2018, it could mop up Dollar and hence thwart Rupee gains beyond levels influenced by Global factors.

Rupee’s fortunes also hinges upon Crude prices and election outcome. If election results result in stable Govt with commitment to fiscal targets, Rupee will have chances of greater appreciation, even if short lived. Considering that political factors have transient impact unless there is a change in economic priorities and perception of weak Governance, Rupee may stabilize based on long term fundamentals like 1) Low inflation, 2) End of Fed rate hike cycle, 3) Cap in Crude prices.

Table 1:

Assets/Currency pairs 2018 close 2017 close % change
USDINR 69.77 63.87 9.25
EURINR 79.80 76.59 4.19
GBPINR 88.77 86.27 2.89
JPYINR 0.6366 0.5668 12.3
USDINDEX 96.06 92.30 4.07
EURUSD 1.1470 1.1998 -4.4
GBPUSD 1.2759 1.3515 -5.59
USDJPY 109.59 112.68 -2.75
USDCNY 6.8785 6.50 5.82
CRUDE 45.40 60.40 -24.8
GOLD 1281 1306 -1.9
NIFTY 10862 10530 3.15
10 Year G-SEC 7.38 7.33 0.68
US 10 Year yield 2.69 2.40 12

Technical picture : USDINR has important resistance at 71.50. Conclusive break out above 71.50 could signal further Rupee weakness to 74.50. Support is expected at 69.10 and later at 67.50.

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