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Indian currency market to remain stable in the near future

Last week, Trump’s comments and North Korea’s threat to launch a missile attack on Guam increased geopolitical risk and led to a rise in the value of safe haven assets. The Japanese yen rose to 109. The euro fell from 1.19 to 1.17. Despite the OPEC meeting in Abu Dhabi, the Canadian dollar has been hammered down to 1.27. This leads to believe the US Dollar Index can well rise to 95. The Indian currency traded at around 65.40 as against 67.90 in the beginning of January.

The Indian rupee is expected to see further depreciation in the coming months and may breach the 70-level against the US Dollar by December and touch 72.50 by the end of 2017, says a Deutsche Bank research report.

According to the global financial services major, post the US election, EMFX (Emerging Markets Foreign Exchange) has seen sell-off, which has also led to some weakening in rupee. “We think the case for further rupee depreciation remains in place, despite a constructive balance of payment position,” Deutsche Bank Research said in a note.

The global brokerage expects India’s current account deficit to rise to only 1.1 percent of GDP in fiscal year 2017-18, from a likely out-turn of 0.5 per cent in 2016-17. The report further said a ‘more active’ US Fed in 2017 would help strengthen the dollar.

Deutsche Bank expects CNY/USD depreciating to 7.4 by December 2017 and euro hitting parity against the US currency next year. “In this scenario, it seems that the rupee will also likely breach 70 next year and head towards 72.5 by end-December 2017, which will erase some of the appreciation of the real effective exchange rate (REER) and help maintain India’s export competitiveness against other emerging market peers,” it added.

The central bank will intervene from time to time to smoothen out volatility, but it won’t prevent nominal depreciation of the rupee, especially when other EM currencies are depreciating in line with the broad USD strength.

“Allowing the rupee to depreciate in line with other emerging market currencies will not only help maintain export competitiveness but also lead to a further easing of monetary conditions, which may be seen as necessary to offset risks to growth,” the report noted.

The rupee started the year on a bullish note, but it is expected to depreciate to 68-69 range by December 2017, amid global political risks and strengthening of the US dollar, says a report.

The rupee has been rallying since January 2017. The domestic currency is trading at around 65.40 as against 67.90 in the beginning of January.

“The rally in rupee reached higher levels post prudent budget, muted impact of demonetization on GDP estimates and historic mandate in Uttar Pradesh to BJP further strengthened the rupee, making it more expensive than other peer currencies,” Edelweiss said in a research note.

Factors like stable macroeconomic fundamentals, forex reserves and contained twin deficit helped the rupee to rally.

“Though India’s macro remains stable, its suppressed inflation and differentials could widen causing INR to depreciate from current levels. INR may not be over-valued but it appears to be over-heated,” it said.

 

According to Edelweiss, rupee will depreciate to 68-69 range by December 2017 and global political risks and strengthening of the US dollar could be the key factors affecting rupee as against the greenback.

The domestic brokerage firm believes that there is a room for the RBI to intervene in the currency markets as banking system liquidity normalizes and inflation will continue to rise expect the interest rates in India to remain at the current levels for fiscal 2017-18 and Fed to hike interest rates one more time by December 2017.

“This narrows the gap and will cause INR to depreciate,” the report added. “Trump’s ability to provide fiscal stimulus will play an important role in deciding the strength of the US dollar.” There appears to be limited scope for INR to appreciate beyond the 64-65 range,” the Edelweiss report said.

India Ratings and Research (Ind-Ra) has revised its outlook for the cotton to stable for 2017-18, from negative last year due to balanced supply and demand situation, which will lead to stable cotton prices.

An increase in acreage, a rise in supply in the first quarter of 2017-18, due to demonetization, and a decline in global inventory will assist in balanced supply, Ind-Ra said in a report. Declining global inventory, expected improvement in demand and the government focus on the textile sector will result in a steady increase in demand in fiscal year 2018, it added.

Ind-Ra expects area to increase by 10-15 percent to 120 million hectares in fiscal year 2018, leading to increased production. “The expectation is in view of recent high domestic cotton prices and high remuneration compared with other competing crops in marketing year (MY October-September) 2016-17,” it added.

The expected increase in acreage in MY17-18 will help in maintaining stable prices in second half of 2018, if there is a positive-to-stable sentiment among market participants about the global cotton trade, it said.

The expectation is in view of recent high domestic cotton prices and high remuneration compared with other competing crops in MY16-17.

Moody’s expects GDP growth in India to moderate to 6.7 percent. India’s sovereign rating has been upgraded by Global rating agency Moody’s Investors Services for the first time in 14 years, taking cognizance of the Centre’s ongoing reforms such as the new Goods and Services Tax (GST) regime and the mechanisms for resolving bad loans and re-capitalize ailing public sector banks.

“The decision to upgrade the ratings is underpinned by Moody’s expectation that continued progress on economic and institutional reforms will, over time, enhance India’s high growth potential and its large and stable financing base for government debt, and will likely contribute to a gradual decline in the general government debt burden over the medium term,” the rating agency said in a statement.

“In the meantime, while India’s high debt burden remains a constraint on the country’s credit profile, Moody’s believes that the reforms put in place have reduced the risk of a sharp increase in debt, even in potential downside scenarios.”

Moody’s Investors Service said, to explain its upgrade for the Indian government’s rating as a local and foreign currency issuer from Baa3 with a positive outlook to Baa2 with a stable outlook. Obligations rated Baa2 are subject to moderate credit risk. They are considered medium grade and as such may possess certain speculative characteristics. Baa3, by contrast, was the lowest investment grade rating.

For the government, the upgrade would be a fitting rebuttal to critics of its handling of the economy, coming on the back of India’s rise in the World Bank’s ease of doing business index, and as a culmination of years of efforts by officials to get global rating agencies to acknowledge India’s improved macro-economic situation.

While it acknowledged that some steps such as the GST and demonetization have ‘undermined’ growth in the near term, Moody’s said it expects real GDP growth in India to moderate to 6.7 percent in 2017-18.

Moody stressed that the disruption effect of these reforms fade and the government helps small and medium enterprises and exporters with compliance issues under the new indirect tax regime, growth will rise to 7.5 percent in 2018-19 and similarly robust growth thereafter.

Moody’s expects India’s debt-to-GDP ratio to rise by about one percentage point this fiscal year to 69 percent of GDP, as nominal GDP growth has slowed following demonetization and the implementation of GST.

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