The big story dominating the market is the almighty dollar. The dollar is extremely strong and any country running a current account deficit is getting penalized, with Turkey being the most extreme example. But Turkey really doesn’t matter beyond a point. I won’t read too much into what is happening with the rupee. But the current account deficit (CAD) is something that is being watched. If you look at the current account deficit of India and many other countries since 2013 when the taper tantru.
The early signs are that. The unemployment in the US is below 4%, inflation is creeping up, and there is a fiscal stimulus in play. So, they are paying much more attention to their own issues. The US market and the economy seem Teflon-like; nothing seems to affect it. At the margin, it might be a bit more inward looking but the primary thing is that the US economy is in such solid shape today…In the US, I have a lot of problem explaining this to my liberal friends about why the market has done.
The rupee has had a tough 2018 on account of a combination of factors: 1) higher oil prices 2) the US Fed tightening 3) trade war and slowing of the Chinese economy 4) nervousness ahead of national elections.All these factors have caused rupee to depreciate more than its peers in Asia and against many of its peers in the emerging market basket.
However, Indian macros are solid with inflation under control, growth is improving and structural reforms are slowly bearing the fruit. The decline in oil prices over the past 6 weeks is another positive.All in all, we do not see the risk of any blowout move in the Rupee. The high real interest rate in Rupee would attract capital flows as the Rupee has become cheaper post depreciation.
Over the next 6 months, how far the Rupee will fall against USD would depend on two factors: how much the Chinese currency devalues and how long the US economic growth maintains its current strong pace, enabling Fed to remain hawkish.
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