Can INR move to 70.00 ?
Written by QuantArt Market
Updated on 6th October 2020
There is a lot of talk on whether USDINR can go to 70.00. Well, in this article we are examining the factors which can take USDINR to 70.00. This article is not about our view on the currency movement and where according to us, USDINR will be pegged in the near future. We are necessarily not of the view that USDINR will go to 70.00. We are just examining whether the USDINR can go to 70.00. Also, if it does go to 70-what are the factors that can take it to 70. We are reviewing the scenario objectively so that you should not be a loser as an exporter who is unhedged or as an importer who is over-hedged.
Let’s talk about the few factors which can take USDINR to 70.00
The Federal Reserve has flooded the market with USD by expanding the balance sheet to USD 7 plus trillion and through zero interest rate. In such a scenario, USD funds are moving across the world in search of yield. So, USD is certainly depreciating against other currencies including emerging market currencies like INR. The dollar index is down around 10% from it’s peak reached during mid-March 2020.
This USD weakness phenomenon may not change because as per Jerome Powell, US rates will be low at least till 2023. Traders are also calculating that in the event of eventuality, the Fed will remain supportive. So basically Fed is going to inject USD liquidity in the market for some time. And in such a situation USD can continue to tank for a while. And if that happens, we will see the dollar index further going down. In such a scenario, USDINR can move to 70.00.
While Fed policies can be the primary driver, other factors that can aid in this kind of movement are as follows –
1. In India, there is a good amount of inflation and RBI believes that keeping INR appreciated is one of the good solutions to manage inflation. So, they are not intervening aggressively to prevent INR appreciation and hence INR had found its way towards 73.00. RBI may continue with this stance and hence it is possible that USDINR may move to 72/ 71/ 70 if the flows keep coming and there is no global market stress.
2. Coming to the flows, the equity markets are overvalued but a good amount of FDIs are coming to India. Reliance deals attracted significant USD and there are many smaller deals happening on a continuous basis as Indian companies raise capital to grow or to remain afloat. We can expect that India will continue to receive a good amount of FDI in the coming period because the M&A activities will be happening. So, if the FDI continues, we will be seeing the inflows and that will certainly put pressure on the INR to appreciate.
3. To add to the flows, our next factor is the current account deficit or rather current account surplus. India has been a country that almost always had a current account deficit. But for now, India is having a surplus and that’s because Indian imports have collapsed, oil imports have also come down. The latest report released on the 2nd of October shows that the Trade deficit narrowed to less than USD 3 bn in September. Narrowing of the trade deficit implies that it will take some time before seeing any significant current account deficit. When you do not have a current account deficit, your balance of payments is balanced. That is your dollar demand and your dollar supply related to export, imports, remittances are balanced. In such scenarios, even small capital flows along with a supportive central bank stance will put pressure on INR to appreciate.
So, considering all these factors, it is possible that rupee may go to 70. However, we have just presented one side of the analysis. There are many other factors which will prevent the rupee from appreciating or possibly keep it to depreciated levels.
We will be writing soon on the possibilities of the USDINR staying at 75.00 or moving to 80.00.
We strongly believe that whether INR moves to 70.00 or 80.00, you should be able to save costs and come out as a winner through effective hedge strategies as deployed by investment bank treasuries. For further discussion on the same, you can drop us a message.
QuantArt is India’s best foreign exchange advisory company Our clients include Tata Group, AV Birla Group, Sterlite Group, Reliance group, Top Banks, NBFCs, MSMEs, and MNCs. Our senior advisors are specialists in treasury management and ex-bankers having worked with JPMorgan, HSBC, Goldman, etc before joining QuantArt. And have been in business for the last 8 years.
We will be writing soon on the possibilities of the USDINR staying at 75.00 or moving to 80.00. To access this article when it is published register with your business email.
Check out our other article on Daily USDINR Morning views