Here's Why The Rupee May Not Tumble Much Further Against The Dollar

The rupee tumbled to over two-year lows on Monday, continuing a weak trend that started after China devalued its currency last week. The world's second largest economy devalued its currency by over 5% in three tranches, in a bid to make its exports more competitive in the global market.

On Monday, the rupee had weakened to 65.21 against the dollar, a two-year low, breaching the September 2013-level it had touched against the dollar in the earlier trading session. Excess dollar demand from exporters is also keeping the rupee pressurized.

The rupee, however, has shed less gains to the dollar compared to other emerging market currencies, since the Chinese devaluation.

While the rupee may be shedding gains against the greenback, it's not a cause for alarm, Dr Arun Singh, Senior Economist at Dun & Bradstreet India said.

“The Indian economy and rupee today, are more resilient to international factors than they were during the last crisis,” he said.

In 2013, the Indian currency had weakened from 54 to nearly 69-70 to a dollar, a tumble that had to be contained by intervention from the government and the Reserve Bank of India (RBI). There is weakness in the rupee, but it is resilient, which is a good sign, Dr Singh said. There are multiple factors keeping the rupee low against the safe-haven dollar right now.

There's China's devaluation. China's economy has been slowing, and the Yuan has been devaluated to jump start it. Worries about an unrest in Ukraine; concerns in Greece are easing, but a consensus on the bailout plan still evades; and expectations of an interest rate hike from the US – a first in nearly a decade, are all keeping the rupee weak.

Dr Arun Singh said that despite the weak trend and numerous international factors pressurising the rupee, he doesn't “expect the rupee to cross 66 (to a dollar) this year”.

“The last 400 days of the new government stable government have improved the sentiment and confidence of investors; FII inflows are strong since. This is despite some concerns in India regarding growth,” Dr Singh said.

The Current Account Deficit (CAD) is down, fiscal deficit is expected to decrease, CPI is down, WPI is in negative territory, and RBI is expected to cut rates going forward, looking at the indicators. All this is increasing inflows into the country, he said.

The US Federal Reserve is expected to cut rates in September. Won't that ensure a sustained weakness in the rupee? Dr Singh said that the US Fed has been talking about an interest rate cut since the last 6-7 months. Indications were first put out in May-June, which was then postponed to September. He says, that a rate cut, however, isn't likely till late-November or December as economic indicators about growth in the US economy, although positive, aren't as strong.

Going ahead, in the mid-term, the rupee will keep international development in focus. Although, Dr Singh says, he doesn't see any significant change. “Unless any dramatic change happens in the US or China”, the rupee won't tumble much further, he said.

Source:dnaindia.com