Indian Rupee To Weaken Further In 2016

Naveen Mathur  Associate Director of the Commodities & Currencies businesses at Angel Broking

The year 2015 has been very spectacular for Indian economy. With the 'Make in India' campaign, the new government has managed to steal attention of the much famed multi nationals like Foxconn, Mercedes Benz, Hyundai Heavy Industries etc. This not being the only move initiated by Narendra Modi government but also direct talks with the who's who of other countries’ representative has benefitted the economy as a whole. It is now become one of the fastest growing emerging market economies of the world.

However, this transformation did not happen over-night. The start of 2015 was not all that rosy which can be seen through the performance of Indian rupee. The currency initially started off from 63.35 levels in January’15 and thereafter saw a depreciation of approximately 4.28 percent by till date (18th Dec’2015). Reason for this major drop has to be blamed more on the external factors than the domestic ones.

Global factors such as the Greece debt-crisis and innumerable sanctions on Russia by the US and European Union over the events in eastern Ukraine and Crimea has weakened the Euro-zone’s economy. Moreover, to revive the economy of China, the regulators played with the trading regulations to boost trading and devalued the Yuan currency to help their sluggish exports. On-and-off problems in oil-rich OPEC nations accompanied with the ISIS stung Syria, Iraq, Libya and Egypt is hampering global commodity prices. In spite of Quantitative easing in Japan, the economy is growing at a snail’s pace.

The OECD has recently cut the global growth forecast to 3.0 percent from 3.1 percent for 2015 and 3.6 percent from 3.8 percent for 2016 citing a slowdown in emerging market economies which has led to huge outflows by the foreign investors.

In order to curb this problem, countless moves were undertaken by the investor-friendly, pro-growth leadership of Prime Minister Modi and sharp acumen of the RBI Governor Raghuram Rajan. Due to this, the Indian economy has been projected to be the fastest-growing economy in the world by 2017.

The Indian government along with the Reserve Bank of India has been trying hard to revive the Indian economy so as to make it a favorable investment destination for the global investors. As a first step, the newly elected Narendra Modi government has facilitated clearances for 42 stalled projects worth Rs 1.15 lakh crores. Moreover, with the help of RBI the government has also decided to prop up state-owned banks by injecting funds of approximately $1.9 billion helping them meet Basel III rules.

The limit for foreign investments in government debt has been proposed to be set in rupees instead of dollars infusing 6,990 crores rupees in public sector banks and invest provident funds 5 percent of future contributions in stocks. Not only this, the Indian ministry has accepted the recommendations with respect to no imposition of retrospective MAT charged on the foreign institutional investors.

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In the coming months, the Prime Minister will inaugurate the Make in India Week in Mumbai from February 13-18, 2016 a mega event in which the government expects participation of over a 1,000 companies and delegates from over 60 countries. The government's target for FDI growth in the next one year is at 30 percent plus.

All the above factors had been undertaken to revive the investment climate and boost foreign inflows which will eventually help the Indian economy to grow and keep the Indian Rupee stabilised in times of crisis like the Yuan devaluation.

The bigwigs of the global financial industry including the head of IMF are concerned about the global economy. The current global situation represents a fundamental downturn. Advanced economies like Euro-zone, Japan are still struggling to come out of the deflationary pressures. Not forgetting the US Federal Reserve’s decision to lift its interest-rate target from near zero, seven years after it pushed its benchmark rate to the floor during the financial crisis. This is likely to make the US markets more attractive for foreign investors.

There has been a major sell-off seen in the domestic markets i.e. Sensex and Nifty in the last three months. Net capital inflows that once stood at Rs. 21047.20 crores on 1st October ’15 is currently standing at Rs. 4932.47 crores as on 18th December, 2015. Moreover, the US policymakers have also signaled an appropriate rate of 1.375 percent by the end of 2016. This could prompt funds to move from emerging markets such as India to the US in expectation of higher returns in the months to follow.

The demand for American currency, due to this, will drag the Indian Rupee lower. Steep depreciation will harm the importers as they will get the goods and services by paying more. Being a prime importer, weak rupee will considerably increase the Current Account Deficit thereby widening the trade deficit in the process. Inflation will be stoked giving the RBI a reason to hold on to high interest rates.

Nevertheless, the Reserve Bank of India has commented about India’s strong economic fundamentals that can withstand any challenging global trends. The Central Bank of India, in order to keep India stabile from external shocks like the US rate hike has reduced the policy repo rate by 50 basis points to 6.75 percent. Moreover, India’s forex reserve which stands at $351.61 billion as on 27th November, 2015 is being used by the state-owned banks to buy/sell on behalf of the RBI so as to keep the reference rate suitable-for-all-levels.

In conclusion, though the domestic factors look promising but external factors such as weakness in Asian markets, US rate hike and turmoil in Chinese markets will govern the trend of the rupee which can depreciate towards 72-mark in 2016.