It’s a new year and right about time to do a pulse check on INR for the coming year. The past few months I was very busy at work and with the currency being relatively stable I did not want to write something just for the sake of writing. As mentioned in the October post the currency stabilised in the last quarter of 2013 and stayed well within the 60-65 range against the US dollar and hovered around the 49 mark against the SGD (INR – Directionless in 4th Quarter)
One would have expected things to remain calm for a few more weeks in 2014 before the Indian Budget and upcoming elections in March and May respectively but the global markets had something else in mind.
The Federal Reserve started the much-anticipated tapering of Quantitative Easing (QE) in December, with reducing the Bond purchases by 10 Billion USD a month to 75 Billion and followed it by a reduction of another 10 Billion in January 2014 which spooked the emerging markets.
Turkish Lira and Hungarian Forint were aggressively sold off and the Argentinian Peso is unofficially devalued. The data from China is not exactly exciting and Indonesian Rupiah and Thai Baht have their own set of problems to deal with. At the same time the RBI came out and surprisingly increased the benchmark rates in January announcements which I thing was more of a pre-emptive move to shore up defences against any potential sell off in the Rupee. With such weakness in the other Emerging market currencies the Indian Rupee, I must say, held ground very well.
But this is just the start of the year and there are quite a few events lined up in the coming months that would determine which way the Rupee moves. On the global macro side the course of Global Financial Markets a.k.a. the pace of QE would drive the general sentiments towards emerging markets. On the domestic front The Indian Budget announcements and the general elections would be the key determinants.
Looking at the global front I do not expect the federal reserve to stop tapering and ultimately end the QE program unless there is definitive bad news on the US unemployment and inflation. This reduction in QE would be Rupee negative and as in May – Aug 2013 time frame has the potential to push the Rupee down.
On the domestic front anything short of a stable government with full majority would be a negative for the markets. I think that this stage there is no one clear party that I could say would achieve the majority.
So in the short-medium term of next 3-4 months the chips are stacked against the rupee and I do expect it to touch trade towards the 65-67 mark.
What that does to SGD INR? Well the SGD has slightly weakened against the USD and has been trading at 1.27-1.28 area. Deteriorating global fundamentals tend to result in strengthening SGD as a safe haven currency. So with the expected weakness in the Rupee and potential appreciation of the SGD, SGD INR could march back to the 53 mark in the coming months.