• HDFC securities
• 27 Mar 2018
• Knowledge Centre

The numbers speak for themselves. The INR-US$ figure stood at 68.145 on 2nd January 2017, and closed the year at 63.84 in December 2017, up 6.3%. On the flip side, it depreciated 2.1% till date in CY 2018, starting the year at 63.68 on 1st January 2018, and touching 65.025 on 25th March 2018.

 

A significant contributor to the strengthening of the rupee in 2017 was strong foreign inflow in the country’s financial markets. This resulted in the need for foreign investors to convert dollars to rupees to buy stocks in India. This, in turn, led to an increase in demand for the Indian currency. Net inflows into the equity market in CY17 stood at Rs 52,224cr and Rs 1,48,533cr in the debt market.

 

“India was a beneficiary of flows into equity markets in 2017, initially from abroad, and later from domestic sources. This led to the Rupee appreciating smartly in 2017,” said Deepak Jasani, Head Retail Research, HDFC securities Ltd.

 

Circa 2018

 

On the flip side, the picture in 2018 looks bleak as of now. As of 25th March 2018, the Rupee has depreciated 2.1% from the start of the year. Though the Rupee’s short-term strengthening against the dollar early this year came as a breather, the reasons for this were more to do with negatives in the US economy, rather than positive domestic triggers. Given that, the domestic currency’s journey in 2018 doesn’t inspire confidence. The main triggers responsible for the Rupee’s weakness this year include:

 

• Stubbornly high levels of NPAs in banks despite undertaking corrective action,
• A surge in the current account deficit and fiscal deficit, 
• The unearthing of frauds in Indian banks, and 
• A rate hike by the US Fed.

 

FIIs have become net sellers in the debt markets selling debt papers of 1663.48cr so far in 2018.

 

To add to the mayhem, the Trump administration has stated that it will impose tariffs of 25% on imported steel and 10% on imported aluminum. India could indirectly get impacted if the tariff war escalates, as its exports’ momentum generally, and for metals, in particular, could be impacted. The country’s metal exports have witnessed a sharp surge in the last few years. While total exports grew 5% in FY17, iron and steel exports rose 58%, and aluminum and associated articles recorded an increase of 23%. This is expected to continue going ahead, as domestic consumption has not increased in spite of an increase in domestic output, owing to capacity expansion.

 

Looking at macros

 

Macro-economical data that has come in till date does not paint a pretty picture either. Higher expenditure has resulted in India's fiscal deficit touching Rs 6.77 lakh cr at the end of January this year. This is 113.7% of the target for the entire fiscal.

 

“The macros picture for India has steadily deteriorated since end 2017. Trade and current account deficit have widened because of inelastic imports, while exports have grown at a slower pace. The domestic political situation has deteriorated ahead of the spate of state elections, and the general elections in early 2019. Rising interest rates abroad and high valuation relative to corporate earnings growth are reducing the lure of Indian equities for overseas investors, who have chosen to take some profits out of India. If this situation persists, then we could see the Rupee coming under increasing pressure going forward,” said Mr. Jasani.

 

Though it seems like a period of ‘wait and watch’ of the unraveling of events and data that would impact the Indian currency’s journey in 2018, the chances of its appreciation seem to be slim.