Money market professionals routinely describe exchange rates in terms of “resistance levels” or “psychological barriers”. Exchange rates are often said to resist movement towards some rounded number such as Rs 60 to a dollar, 100 Yen to a dollar or Rs 100 to a pound.
Having cantered past 62 to a dollar, the debate now is veering around the next psychological barrier — a scary 65.
The rupee’s value has eroded more than 15% since May and analysts warned that worst may not be over yet implying you may have to brace yourself for a life of 60-plus value to dollar.
“The market outlook is still quite weak, and the rupee’s slide against the dollar will continue,” said Gautam Trivedi, MD and equities head, Religare Capital Markets.
Currency markets, pretty much like other commodities, are a function of the laws of demand and supply. Stronger demand for the currency pushes up its price. The US central bank will soon start unwinding its stimulus programme, which will push up interest rates at US banks.
Besides, demand for dollars have risen as portfolio investors start withdrawing money from emerging markets such as India and park funds closer home. There are also signs of recovery in Europe and Japan that will move funds away from Indian markets pushing up demand for dollars.
“There is a growing concern that QE(quantitative easing) wind-down in the US will affect India and indeed all emerging markets,” said Trivedi
Analysts warned of more pain ahead as the RBI and government move in to cool prices and prop up the currency.
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“Taming inflation or the currency (as is the case currently) may require policies that result in increasing the economic misery for people in the near term. Unfortunately, we see no short cuts,” said Sonal Varma, economist at Nomura.
“Negative sentiments may prevail over positive sentiments for some time which is likely to keep rupee volatile in near term,” said Kuntal Sur, director, KPMG India.