With the Indian rupee listed at 71.65 versus the US dollar in November 2018, the rupee appeared to stabilize and strengthen up for 2019. Global events over the last decade have affected the Indian financial markets in general with commodities, bonds, equity and the currency all feeling the heat. A crude oil price slip four years ago caused our current account deficit reduction while strengthening the growth of the equities market and bringing in the dollars to impact seeing the rupee firming up. The then newly elected government was stable and zealous and the little instability on the domestic front saw the rupee strengthening.
The factors for the decline:
In ushering in 2019 the promises of global events dominating the financial scene was a given. The outcomes this time around saw a 9% decline in the rupee value which ended with a 15% value decrease as in October 2018. The main factors contributing to this were the prices rising for crude oil to 86 USD for Brent and the Federal rates rising with the US dollar’s strengthening.
WTI crude oil prices plummeted in October 2018 and November saw prices per barrel decline from the once 77 USD to 57 USD. Domestically too we were on the urge of a historic mid-term election. The turmoil in Turkey and the tumbling of currencies caused also in some measure a very conservative currency market globally and especially so in the emerging Indian markets. This was the stack against the Indian rupee and naturally, the rupee in 2019 would see a downward trend in response.
A sudden and strong crude oil prices surge with the FPIs-foreign portfolio investors withdrawing from the debt segments has kept the pressure on the value of the Indian rupee and the equity markets. RBI on its part did intervene with the REER- Real Effective Exchange Rate as its basic focus.
The interventions were sanguine and half-hearted and designed to keep the weakening steady. This measure as understood by economists was what could be done. To effectively fight such factors in a currency war low inflation rates and higher efficiency are prime factors. No currency war is ever won by quarreling!
The US scenario with its higher Fed rates will mean the dollars will flow back to the US and in 2019 the rupee will continue to steadily weaken as US dollars become a globally scarce commodity. The policy of “USA first”, the meddling with the financial policy by US President Donald Trump and the protectionist measures implemented in the USA are all sources of trouble and fear for the trade markets in India.
The uncertainty over a clean Brexit deal hurts India too as money moves away and foreign investors prefer to invest in the safe bet of the rising dollar value. Concurrently a listless slipping market can see a further decline in the rupee values which may even test the 68-69 limits.
The 2019 predictions:
So, how much will the rupee strengthen against the US dollar and what should we do now? A 10-year study on the rupee shows the recovery of the rupee could proceed well into 2019. A Fibonacci retracement study considering five parameter legs of the rupee movement from high to low values discloses that the rupee always returned to values between 50 to 61.8% of the rupee support values when the rupee fell from the 2018 January rate of 63.59 to the October 2018 rate of 74.48.
The mid-term polls have fortunately taken us past a phase of uncertainty with the BJP romping home with a majority and offering an outsider chance of helping stabilize the market with economic growth and unfinished financial measures like demonetization, digitalization and such, finally seeing the light of day. A stable government is a welcome feature and the RBI interventions to stem the rise in inflation could shore up the weakening rupee’s downward spiral and bias.
Predictions remain so till they turn into results and facts. But given the above factors, it would not be unreasonable to see 2019 ending with the US dollar value at 75 Indian rupees.
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