Is the end of Rupee’s woes in sight?

Against the backdrop of turmoil in China and jitters over a looming US interest rate hike, the Indian rupee has been gripped by Bears in recent times as an uncertain global economic outlook triggered a capital flight from emerging markets. The Rupee has shed 4% of its value this year, while tanking over 2% since August 11 when China’s decision to devalue the yuan by the most in two decades sent shock waves to financial markets worldwide. However, the US Federal Reserve’s surprise decision to refrain from a hike in borrowing costs brought some relief to the domestic currency, which registered its biggest gain vs the greenback in two years, surging to a one-month high on Friday.

However, the rupee’s comeback may be short-lived with high uncertainty still prevailing on the global front, meaning that the currency will be prone to downward pressure that will be cushioned by expectation of further policy easing by the RBI and hopes of progress on key reforms. We explain below why.

Firstly, Even as it maintained status quo on interest rates last week, Fed meeting materials show that 13 out of the 17 policymakers warrant a rate hike this year, meaning that markets must brace for US policy tightening in the near-term. The Fed which has kept its key rate near Zero since 2008, next meets on October 27-28 and then on December 15-16. Higher interest rates in the US will increase the lure for US dollar denominated assets that may lead to further capital outflows from risky assets, causing the rupee to depreciate, taking severe toll on Indian companies having large overseas debt.  Foreign investors, who pulled out a record Rs 17,428 crore from Indian stocks in August 2015, have emerged as net sellers of Indian equities & bonds to the tune of Rs 4,600 crore in September, thus far.

Secondly, the ‘China’ factor will continue to dominate sentiment across global markets with uncertainty surrounding the full extent of the country’s slowdown. Recent factory, investment and export data have signaled that China’s woes seem to be deepening, defying efforts by policymakers to fix the country’s slowdown. Being the world’s second biggest economy and the largest commodity player in the world, a rout in China means diminished fortunes for the global economy, hence inviting risk aversion among foreign investors.

Thirdly, it is foolish to pin the entire blame of an FII exodus on global factors as slow progress on key reforms such as the GST which has been derailed by political headwinds, and a domestic economic slowdown have also contributed to the rupee’s slide in recent weeks. India’s economic growth slowed to 7% in the June quarter from 7.5% in Q4 FY 2014-15 while exports have been in contraction terrain for nine straight months.

However, its’ not entirely looking murky for the rupee as the Fed’s move to hold off an interest rate hike has almost guaranteed an RBI rate cut on September 29 which should support sentiment. The possibility of at least another rate cut beyond September, in the ongoing fiscal, looks high as a softening global commodity cycle amidst weakness in China keeps oil prices lower, narrowing the fiscal and current account deficits, taming inflation. At the same time, the RBI will keep a close watch on the effect of a deficient monsoon on food prices which may limit policy easing room.

On the growth front, much rests on the Modi government’s ability to fast track key reforms with hopes riding high on the passage of the GST bill in the Winter Session of the Parliament. Recent measures to boost public investment in roads and railways may bolster economic growth while a quick fix on the problems plaguing the banking sector which is sitting on a pile of stressed assets, is also the need of the hour, a move which may revive credit growth and accelerate the corporate investment cycle.

The Bottom-line- the Rupee may continue to depreciate against its US counterpart in the coming months amidst uncertainty over China and a US rate hike,  with hopes of a rebound in the domestic economy  likely to offer some relief.

What’s Ailing Dalal Street?

Gloom and Doom has descended on Dalal Street which has been hit by the triple whammy of deepening China woes, jitters over the timing of a maiden US interest rate hike since 2006 and a domestic growth slowdown, triggering an exodus of foreign capital from Asia’s third biggest economy.

Let’s have a glance at the dismal performance of Indian stocks, lately which have fallen prey to a global financial market rout amidst fears over a worsening slowdown in China coupled with a looming US interest rate hike. Marking four straight weeks in the red, the Sensex, the second best performer among top markets in 2014, has sank almost 12% since the start of August, crashing to a 15-month low of below 25K, while the rupee too, has bitten the dust, plummeting to a two-year low, falling past the 66 mark vs. the USD as foreign investors exit risky emerging market assets amidst signs of a fast faltering global economic recovery.

China’s decision to devalue the yuan by the most in two decades which fueled fears over a fresh global competitive currency war has sent global stocks in a tailspin with the so-called Black Monday (August 24, 2015) wiping out as much as USD 2.7 trillion from equities worldwide including Rs 7 lakh crore from the Sensex, which recorded its third worst day in history.

As if the China and the US factor wasn't enough, slowing economic growth has exacerbated the domestic market’s woes, prompting a record sell-off of Rs 17,428 crore from Indian stocks by overseas investors in August 2015.

India’s economic growth cooled to 7 per cent in the April-June 2015 quarter from 7.5 per cent in Q4 FY 2015-16 while manufacturing expansion eased in August and growth of the eight core infrastructure sectors hit a three-month low in July, dashing optimism over the India growth story.

Looking ahead, no major respite is in sight for Dalal Street in the near-term with caution set to prevail ahead of the two-day meet of the Fed on September 15-16 where the world’s top central bank may offer some cues over the timing for monetary tightening in the US. Domestically, the focus will be on the July IIP data due on Friday with a slowdown in industrial output growth likely to raise calls for an RBI rate cut on September 29. Investors will also seek progress on key reforms such as GST which has been hit by political roadblocks.