Dollar Hits 12-Year High Against Euro: Where Is Rupee Headed

The Indian rupee could temporarily hit the 64 levels against the US dollar amid speculations of an earlier-than-expected hike in interest rates, says Ashutosh Khajuria, president of treasury at Federal Bank.

The rupee on Wednesday hit an over 2-month low of 62.84 against the US dollar, as the greenback rose to a 12-year high against euro and an 8-year high against Japanese yen. Driving up the US dollar is speculation that the US Federal Reserve will hike rates earlier than expected after better-than-expected jobs data.

There is a chance that the US Fed could prepone its rate hike to June this year from the fourth quarter to avoid heating up of the economy in the future, Mr Khajuria said. Importantly, he expects Fed chief Janet Yellen to drop the word "patience" from its next meet on March 17-18. For analysts "patience" has been the buzzword in Fed's policy statements in the past to get an indication of rate hikes.

But Mr Khajuria does not expect the rupee to witness the same volatility it saw in August 2013 when the Indian currency hit its all-time low of 68.80 levels on concerns over tapering of the US stimulus. The rupee's weakness was exacerbated by India's record high current account deficit and high fiscal deficit.

Mr Khajuria says the rupee is much better placed than two years ago and it could remain in 62 and 63.50 levels against the dollar. India's current account deficit has dropped to an estimated 1.3 per cent as compared to a record high of 4.6 per cent in 2013. Also, India's foreign reserves have swelled to a record high of close to $340 billion.

The banker also sees the Reserve Bank of India being comfortable at rupee levels of 63-64.50/dollar. Despite the rupee's slide against the US dollar, it has appreciated against other currencies like euro, affecting India's exports, Mr Khajuria said.

The rupee was at 60.85 levels against the US dollar exactly a year ago. But against currencies like euro it has appreciated sharply to current levels of 67.44/euro from 84.45 a year ago.

In a statement on March 4, RBI chief Raghuram Rajan also voiced concerned over the rupee's strength. "The rupee has remained strong relative to peer countries. While an excessively strong rupee is undesirable, it too creates disinflationary impulses," the RBI chief said.

Source:profit.ndtv.com