Spot price = INR 57.9850 per $1 (at 9:20 p.m. EST June 13, 2013)
The Indian rupee has been the worst-performing Asian currency over the past month. This last Tuesday the USD:INR rate reached 58.985 — an all-time high! This latest upswing in the USD:INR rate begun last month near 54.00 and was fueled by a combination of domestic and international factors (see below). The all-time high rate prompted an unexpected appearance in the market by the Indian government. Their central bank , the Reserve Bank of India, intervened directly into the FX market by selling U.S. dollars. The intervention was successful, as it is now trading lower; however, seldom does one bout of intervention by a central bank turn the tide on a currency. I’ll make a side bet that intervention will be needed again to prevent further rupee weakness.
Here is my market analysis on the Indian rupee using three different types of analysis: Fundamental, Technical and Sentiment. As I’ve mentioned before, this multi-dimensional analysis has worked well for my clients over the years. For an explanation of how and why it works, go to http://www.svb.com/Blogs/Scott_Petruska/Analyzing_the_Currency_Markets__Improving_the_Odds_of_Success/
The two tables below show performances of the major global currencies against the U.S. dollar over the last month (left table) and since March 2009 (right table), which was the bottom of the global financial market meltdown.
In the last month the Indian rupee weakened by 6.16 percent against the U..S dollar. You can see, however, that the rupee was not alone in poor performance, as several currencies weakened by about the same percentage over the same period. Interesting to note, these other currencies were from similar high-flying countries — export-led economies with high growth rates and attractive bond yields — definitely “risk on” currencies, and which are now suffering in a “risk off” environment. Looking at the table on the right, you can see that the rupee was the only major currency not to appreciate against the dollar following the financial market meltdown in 2009, a fact that may provide valuable insight into the rupee’s performance over the coming months or longer.
There are multiple themes currently driving the value of the Indian rupee. I have listed below several, which I believe are in order of impact:
- “Risk Off” Of Emerging Markets: Over the past few weeks emerging market currencies, stocks and bonds have been hit hard, very hard, primarily on rising investor concern over the prospect of the U.S. Federal Reserve “tapering” its $85 billion per month bond buying program, which was designed to drive down long-term interest rates and stimulate the economy. Emerging economies, including India’s, have been among the leading beneficiaries of these ultra-loose monetary policies of several central banks led by the Fed. One estimate is that $12 trillion in extra liquidity has flooded financial markets since the 2009 crisis. Bearish for the rupee.
- FX Intervention By The Reserve Bank Of India (RBI): India’s central bank unexpectedly intervened in the FX market this morning, and although the amount of dollars they sold may not have been huge, the statement they made by intervening was large indeed. They are now a force in the market to be reckoned with. Since the government prefers a strong rupee in order to control import costs and encourage foreign investment, I expect to see them again if and when rupee volatility or weakness gets to an extreme level (USD:INR 60.00 would certainly be a key psychological level, and where the RBI may intervene again). FX reserves maintained by the RBI are large, $300 billion, ranked 10th of all countries, so they have plenty of ammunition with which to intervene. Bullish for the rupee.
- India's Slowing Economic Growth: India is Asia’s third largest economy. It’s economy grew by 5 percent last year, its worst growth rate in a decade. It was hurt mostly by the uneven global recovery and lower foreign investments, which looks likely to continue over the foreseeable future. Bearish for the rupee.
- Political Risk, Inertia And Red Tape: The rupee is very vulnerable to political instability. Last month one of the partners in Prime Minister Singh’s ruling alliance withdrew support adding to the challenge of passing key legislation to reduce the massive budget deficits and implement infrastructure related projects; assembly elections in four states this year and a general election — a mega event for India — early next year will be vital for the development of India’s economy. Bearish for the rupee.
- India’s Current Account Deficit - Huge & Growing: Although the gov’t plans to restrict the insatiable demand for gold by its people, the only real hope for improvement this year would be if gold prices dropped significantly. India is also a major importer of oil — the 4th largest in the world; oil imports comprise 85 percent of India’s total trade deficit! Bearish for the rupee.
- India Needs Foreign Investment: Institutional investors have been withdrawing money from India. One of the main objectives of the current Indian government is to pitch India as an attractive destination for Foreign Direct Investment flows. Bearish for the rupee.
- India's Inflation Rate Is Too High: The weakening rupee has increased core import costs & inflation, CPI is running at 7.7 percent! Home prices have been increasing an annual growth rate of 26 percent since 2009! Bearish for the rupee.
- Government Corruption Scandals: Recent widespread corruption scandals have reinforced the negative perception of the Indian gov’t and has raised doubts about the availability of a level playing field for businesses. Bearish for the rupee.
- Attractive Gov’t Bond Yields: Although Indian government bonds are rated BBB-, the lowest investment grade, now that global “tail risk” is declining (at least for a while anyway), yield-hungry investors remain attracted to Indian gov’t 10-year bonds yielding 7.25 percent! Bullish for the rupee.
Most of us manage our currency exposures within a one year time horizon. I present below charts of the price action of the USD:INR that should help us forecast where I think the Indian rupee may go over the coming months/year.
The climb in the dollar from late April to the present was nothing short of spectacular — nine percent in less than 6 weeks! (annualize that!) Interestingly, it was almost the same percentage move in the dollar that was seen back in late 2012 in the move from 51.39 to 55.88.In the lower window of the chart you can see the fluctuations of the Relative Strength Index (RSI), an overbought/oversold indicator that moves between 0-100. The RSI recently reached historically high levels — 88 was reached on Tuesday coinciding with the all-time high in the USDINR — meaning that the U.S. dollar is overbought and that a correction (not necessarily a reversal) is probable. However (here’s the warning!), overbought markets can get even more overbought, and when corrections do occur, they can be fleeting. So, if and when we get a correction, the U.S. dollar may simply fall back into the so-called retracement “box” — the price range for this “box” is 55.60 to 56.60 — before resuming its uptrend. I put the odds of a move down to 55.60 – 56.60 over the next 1-2 months at 65:35.
Analyzing a long-term chart is also quite useful for it shows where we are within the long term trend. The USD:INR has been trading within an upward sloping channel since 2008. As you can see, it is now trading slightly above the top of the channel line, which for June comes in at 57.72. Breaking above the top of a channel line is typically a bullish signal, but just to be safe and not get whipsawed, it may be best to wait and see if the closing price at month end remains above the channel line. If it does, then it technically confirms that a break has taken place and it’s time to get bullish the dollar once again; the next objective in the USD:INR would be 70! Notice how the break above the channel line about a year ago failed/reversed lower. When setting odds, I am influenced by that failure, so, I’d put the odds of a significant move higher over the next three months at only 40:60.
My final comment on the Technicals: the USD:INR uptrend is intact, the trend has certainly not reversed itself...not yet anyway. However, the odds increasingly favor a correction lower, as it has met upward resistance in the form of (1) a short-term overbought condition in the dollar, and (2) the top of a long-term channel line.
For additional help in forecasting currency trends, I typically use the CFTC’s Commitment of Traders (COT) Report, which provides weekly data on currency trading/positioning in the futures and options on futures exchanges. Unfortunately, there are no U.S. exchanges where futures and options on the Indian rupee can be traded, so I am not able to draw the conclusions on sentiment that I typically draw from the COT reports.
Both the Fundamentals and Technicals are bearish on the Indian rupee (bullish on the dollar), and despite the potential for a rally in the rupee in the short-term, we should remain generally bearish over the medium to long-term.
Currency Management Action Plan
First, a few things to consider when developing a currency management strategy for the Indian rupee: 1) treat currency risk as a business risk, to be managed like other business risks, 2) movements in the Indian rupee may/may not have a significant impact on your firm’s performance, and 3) take into account the probabilities assigned to the expected movements of the currency.
My Recommendation: The USD:INR has moved a great distance in a short period of time. It trades well above anyone’s budgeted or negotiated rate. I believe the best hedging advice would be for those firms with future expenses in India to lock in/purchase at least a portion of the INR at these favorable rates using NDFs (a tactical strategy). Firms with future receivables denominated in rupees should wait for a correction lower, then hedge/sell the INR forward using NDFs.
Please feel free to contact me to discuss any of my market analysis presented above.