Indian Rupee -- Overall Dollar Cues to Give Direction

The same old story was witnessed in Rupee movements over the last month. Volatility continues to rule the roost, albeit in a more modest manner. In the absence of any direction from the flows angle, Rupee movements have become increasingly dependent on cues from overseas Dollar movements. The latest rally has also been more of a case of Dollar weakness-induced strength, rather than an inherent shift in fundamentals.

The major news this month was the sharp decline in the monthly exports growth number to -12.1% YoY in October as compared to 30.9% growth seen in April- September. This was the first negative number seen in seven years (the last instance was Oct 2001). This trend is also mirrored in other peer group economies in the region. It is also in sync with the sharp slump in economic activity being seen globally.

The fiscal stimulus package announced by the government and the rate cuts by the central bank have also helped lift sentiment, both locally as well as among India-focused investors abroad, as reflected in the positive numbers on portfolio flows into equity since then. However, it is too early to draw a conclusion from these numbers as we have seen such flows followed by sharply negative numbers almost immediately. Elevated risk aversion conditions would probably take some more time to settle down. The Dollar funding squeeze is likely to continue exerting strong pressure on the Rupee via the NDF arbitrage channel. However, as risk perception stabilizes, the weak underlying fundamentals of the Dollar are expected to come into play, leading to an across the board strengthening against the greenback. In the near term, we expect Rupee movements to be extremely volatile with a weakness bias.