Rupee strength 80. but can be wasteful

Seshagiri Rao, joint managing director and group chief financial officer of JSW Steel Ltd, said the rupee is unlikely to remain below the 80 mark for a sustained period in the next three to six months, according to a view shared by currency analysts and economists.

“Fundamentally, I do not see energy prices falling below the lower band of the $80-100 per barrel range, simply because there is no additional capacity to meet global demand. While inflows (foreign portfolio investment in equities) may revive, a significant drop in global energy costs is unlikely to reduce India’s import bill. Oil may trade at $90-95.”

According to Bloomberg data, the rupee weakened by 45 paise to close at 81.26 against the dollar on Monday. On Friday, the local unit posted the most gains in four years, rising over 100 paise after a slower-than-expected rise in US retail prices, rekindling hopes that the Fed would reduce the pace of rate hikes.

Stimulating company earnings may attract foreign inflows; However, if valuations of US and Chinese markets are more attractive, then FPI investments will flow into those markets, at least in the short term and cap rupee appreciation, Rao said. “The rupee may remain in the 80-83 band against the dollar in six months or more,” he said.

Endorsing Rao’s views on the rupee, Crisil chief economist DK Joshi said volatility will be the “order of the day” in FY23.

“There should be a significant change in fundamentals to bring the rupee below the 80 per dollar mark,” Joshi said. “Changes in productivity levels, lower crude oil prices and many other factors will determine this.”

The rupee fell 9.17% to 81.26 on Monday from 74.43 on November 12 last year, much of it on the back of a hike in energy prices after the Ukraine war and FPIs net-sold shares worth $19.12 billion in 2022. While analysts expect the rupee to benefit from the Fed’s expected slowdown on rate hikes, analysts question this logic with similar actions from other central bankers.

Anindya Banerjee, head of currency derivatives at Kotak Securities, said: “If the Fed slows down on hikes, other central bankers who expect our currency to strengthen against the dollar may nullify any gains.” Rupee will move in a range.” of 81.30-82.30 by the end of the year.

Madan Sabnavis, Chief Economist, Bank of Baroda, believes that the rupee is trending between 81 to 82.50 in the short term.

While 80 remains a stiff resistance, Rao of JSW Steel does not think the 83 mark will be breached, thanks to India’s real interest rate being positive against negative real interest rate in the US. The real rate is calculated by subtracting inflation from the 10-year benchmark government bond rate.