Indian rupee outlook: Currency set to weaken to Rs 66/$

By Mohan Shenoi
Indian rupee outlook: Markets calmed after a turbulent February. Global risk appetite was supported by the growth momentum but sluggish inflation curbed central bank enthusiasm to normalise monetary policies speedily. Headwinds from protectionist US trade policies, difficult Brexit talks and inconclusive Italian elections were balanced by reduced geopolitical risk out of the North Korean offer of denuclearisation and talks. The US dollar was pressured by fears of benign neglect, a political revolving door in the Trump administration, return of twin deficits and widening trade wars. The positive impact of watered-down tariffs on steel and aluminium was undone by rumours of possible tariffs on U$60 billion of Chinese imports. With February inflation in line, the focus shifts to the March 23 Federal Open Market Committee (FOMC) meeting. A 25 basis point (bps) Fed funds hike is priced in but clues to three additional hikes in 2018 will be watched.

The rise of right-wing and eurosceptic parties in Italy's inconclusive general elections was balanced by SPD voting overwhelmingly to join the grand coalition of CDU/CSU led by Angela Merkel. The European Central Bank (ECB) kept its monetary policy unchanged, bumped up its 2018 growth forecast but dropped its easing bias of increasing QE in size and/or duration if conditions worsened. Governor Draghi made dovish comments on inflation, expressed sarcasm on the US tariffs on allies and pointed to a historical fact that the US dollar always rises when tariffs are imposed. UK PM May's dissatisfaction with EU's draft 'Withdrawal Agreement' brought into question the early conclusion to the Brexit transitional deal. Later, the UK Budget forecast higher 2018 growth, better public finances and a GBP37bn Brexit bill.

The Yen gained on Bank of Japan's (BoJ) slightly trimmed asset purchases in the 25-year plus maturity and perversely, a cronyism scandal in the sale of state-owned land involving PM Abe's wife and FM Aso Taro. Also, the calm on the Korean peninsula was balanced by the imposition of US trade tariffs. The rupee reeled from the $2 billion foreign trade-credit related, banking fraud in a PSU-bank causing it to weaken dramatically to 65.32/U$. A win by the BJP-backed coalition in three North-Eastern states pulled it back beyond 65/$. But the US tariffs and the resignation of TDP ministers from the NDA caused its depreciation to 65.20/$. Macro data signalled a continued turn-around with January factory output rising a robust 7.5% while retail inflation slowed to 4.4% in February. Later, the trade deficit narrowed to $12 billion, export growth deaccelerated to 4.48% while imports also contracted by 10.4%
One year forward premiums slumped to 3.67% as PSU banks conducted buy/sell swaps to receive premiums and replenish unpaid/withdrawn dollar trade credits. Additionally, the Reserve Bank of India (RBI) announced an injection of additional liquidity of Rs 1 lakh crore variable rate term repo auctions across March 2018 to infuse liquidity. In the new Fiscal year, the increase in twin deficits, calendar seasonal and diminishing global liquidity will stress the rupee. Over Q1FY2019, the rupee is expected to weaken to 66/$.

MONEY MATTERS
The US dollar was pressured by fears of benign neglect, a political revolving door in the Trump administration, return of twin deficits and widening trade wars  
The rupee reeled from the $2 billion foreign trade-credit related, banking fraud in a PSU-bank
The writer is president and chief operating officer, Kotak Mahindra Bank
 

(Source: DNA Money)