Rupee Makes Some Recovery But May Touch 68 Against US Dollar: 10 Points

The rupee took support from a weakness overseas, despite the Fed announcing a much anticipated rate hike.

Rupee Makes Some Recovery But May Touch 68 Against US Dollar: 10 Points

Some recovery in the rupee comes a day after it registered a near one-week low against the dollar

The rupee strengthened by eight paise to 67.57 against the US dollar (USD) on Thursday morning, as weakness witnessed in the greenback overseas supported the domestic currency (INR). The fall in the dollar, with the dollar index erasing all of its gains so far this week, came despite the US Federal Reserve announcing a hike in the key US lending rate overnight and signaling two additional hikes this year. On Wednesday, the rupee had declined 16 paise to close at a near one-week low of 67.65 against the US currency on sustained dollar demand.

Here are 10 things to know about rupee's movement against the US dollar (INR vs USD):

1. The Federal Reserve raised its benchmark overnight lending rate a quarter of a percentage point in the range of 1.75 per cent to 2 per cent. The US central bank dropped its pledge to keep rates low enough to stimulate the economy "for some time" and signalled it would tolerate inflation above its 2 per cent target at least through 2020.

2. With the much anticipated rate hike by the American central bank now behind, investors' focus shifted to the upcoming meeting of the OPEC (Organization of the Petroleum Exporting Countries).

"As expected, the Fed raised interest rate by 0.25 bps with an indication that it is likely to go in for 2 more rate hikes during rest of 2018. With this, we expect the rupee to trade between 67.30- 67.80/68.0 levels till the next directional trigger on oil supplies from the OPEC meeting scheduled for next week, unless the ECB (European Central Bank) comes with some surprise announcement of changing its current stance during the day," said Salil Datar, CEO and executive director, Essel Finance VKC Forex.

3. Markets are now looking forward to policy announcements from the European Central Bank (ECB) later in the day where the bank will debate whether to end its huge asset purchases by year-end.

4. The current account deficit came in at $13.0 billion, or 1.9 per cent of GDP, in the January-March quarter, official data on Wednesday showed. The current account deficit - which implies more imports than exports - rose sharply from $ 2.6 billion in the corresponding quarter a year ago, but moderated marginally from $ 13.7 billion in the preceding quarter.

5. "The deterioration in India's current account deficit to $13.0 billion in Q4 FY2018, is in line with our forecast of around $12-14 billion. The size of the current account deficit in Q4 FY2018 nearly rivaled the full year deficit recorded in FY2017, underscoring the impact that rising commodity prices have on the external balances of net importers such as India," said Aditi Nayar, principal economist at credit ratings agency ICRA.

"If crude oil prices resume an uptrend, the negative sentiment related to a rising current account deficit and the possibility of a BoP (balance of payments) deficit in FY2019, may spur the INR to intermittently test the previous all-time lows," she added.

(Also read: Latest petrol, diesel prices)

6. "Nearly 46 per cent deterioration in trade deficit in FY18 was due to oil. However, higher services exports and remittances in FY18 reduced ballooning of CAD. Despite widening of CAD, strong capital and financial account flows resulted in US$43.6 billion increase in foreign exchange reserves, which provided strength to the currency," said Devendra Kumar Pant, chief economist at credit ratings agency India Ratings.

"Going forward current account situation in FY19 is likely to worsen and this coupled with weak capital flows will exert pressure on currency. Deteriorating current account and fiscal slippage does not augur well for macro fundamentals," he added.

7. Oil prices eased on Thursday, dragged down by rising output and a decline in China's refining activity, although strong fuel consumption in the United States and a drop in its crude inventories provided the market with some support. Brent crude futures were near $76.50 per barrel, down 0.25 per cent from their last close. At these levels, crude oil prices have registered a recovery of at least 4 per cent from 2014 highs around $80 per barrel touched last month.

8. Domestic sales for diesel and petrol rose to record highs in May, pushing the country's overall fuel consumption for the month higher year-on-year, data from the Petroleum Planning and Analysis Cell (PPAC) of the oil ministry showed last week. Fuel consumption, a proxy for oil demand, totalled 18.72 million tonnes last month, during which diesel sales soared to 7.55 million tonnes and petrol consumption climbed to 2.46 million tonnes - the highest monthly sales figures in PPAC data going back to April 1998.

9. "Given that FDI flows - unlike during the past three years - are no longer sufficient to fund the CAD, the INR is likely to remain volatile and would be susceptible to portfolio flows," financial services company Edelweiss said in a note. "The stress on BoP is already visible in Q1FY19 with the INR depreciating 4 per cent; the RBI had to intervene to stem the depreciation."

10. Meanwhile, weakness in the stock markets, wherein the Sensex fell more than 200 points in the morning, kept the gains in the rupee under check. At 10:45 am, the BSE Sensex traded 189 points lower at 35,549 while the NSE Nifty was down 66 points at 10,789, dragged lower by banking and IT stocks.

(With agency inputs)

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