Rupee trades over 68-mark against dollar, may remain under pressure for rest of 2018; here's why

Indian Rupee continued to trade over 68-mark against US dollar benchmark index at interbank forex market today. The domestic currency opened weaker, around 68.12 levels on spot, against US Dollar. However, the weak opening was not as bad as the offshore market indicated, which was trading close to 68.30 levels on spot reference. It needs to be noted that, rupee has plummet to 17-month low by earmarking 68-markindicating its worst performance at EM market. It was only on June 6, when rupee strengthened against US dollar by earmarking near 66-mark, which was boosted by RBI’s monetary policy decision wherein the central bank decided to hike policy repo rate and still maintain a neutral stance. 
 
However, at around 1246 hours, the Indian rupee managed to reverse trend and was trading at 68.085 above 0.385 or 0.56% against US dollar. 
 
Anindya Banerjee, analysts at Kotak Institutional Equities, said, "Probably sharp decline in oil prices and fear of RBI intervention is keeping the pair capped. Over the weekend, merchandise trade data for the month of May was released and it showed that Indian exports clocked a growth of over 20%, a 6-month high. Exporting sectors, which helped to push the shipments in May include petroleum products, chemicals, pharmaceuticals and engineering."
 
Banerjee added, "Export performance have shown as steady path of improvement, not surprising, as economy has stabilised post twin shock of demonetisation & GST. AT the same time, world economy is doing well and that is good news for Indian exports. All in all, strong trend of exports augurs well for growth in the economy. Having said that, we need to see improvement in exports from major labour-intensive sectors, such as gems and jewellery and ready-made garments, which continued to see de-growth."

Interestingly, Banerjee also explained that, growth long cannot drive the Rupee, it needs the other factors to fall into place. US economy is performing well and their labour market is tightening fast, leading to fear that wage growth can take-off soon. Various industries are complaining of labour shortage. At the same time, US government is committed to keep following an expansionary fiscal policy. 
 
With mid-term polls in November, Banerjee said, "we expect US to keep pushing on fiscal button and as well as on trade button, to keep the voters happy. That means, US Fed is going to remain hawkish and keep tightening the US monetary policy. Trade war and US monetary policy tightening will continue to be double whammy for emerging markets from time to time in 2018."
 
Add to that the political risk premia in a pre-election year, Banerjee said, "Rupee will be under pressure for the rest of 2018. The saving grace can come by way of a sharp plunge in oil prices. Oil has fallen by over 10 percent from the 52 week high but it needs to sustain at lower levels, post OPEC meeting this month." 
 
In previous trading session, Indian rupee weakened against dollar index at 68.470 down 0.605 points or 0.89% on Friday. Meanwhile, foreign investors removed Rs 1,374.23 crore cumulatively from equity, debt and hybrid market on Friday, as per NSDL data. 
 
According to Banerjee, technically, USDINR remains in an intermediate uptrend as long as 67.25 is intact on spot (previous week's low). However, an intermediate trend reversal would occur below 66.85 low seen a couple of weeks back. Between 66.85-67.25, it can be a no trend phase." 
 
"Trade remains to buy on decline, engineered by the central bank. For the week, buying can be done between 67.70-67.90 zone, with stops below 67.60 on spot, a daily closing basis. Target remains May highs of 68.50 on spot and above that, around 68.85, all-time highs," Banerjee added.