Rupee to stay volatile, all eyes on US Fed, BoJ monetary policies

MUMBAI: The rupee is set to remain volatile for a few months, primarily due to external factors such as the monetary policy reviews by the US and Japan. But the

MUMBAI: The rupee is set to remain volatile for a few months, primarily due to external factors such as the monetary policy reviews by the US and Japan. But the currency will be spared sharp falls and is likely to trade in the 67-68 per dollar range.

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In the year so far, the rupee has fallen by 1.2%. It ended at ₹67.01 against the dollar on Tuesday.

While US Fed chairman Janet Yellen indicated in August that the “case for a rate hike was strengthening”, experts have said that the interest rate hike from close-to-zero levels may not happen in this policy review, which is scheduled to begin on Wednesday.

But markets will keep their ears tuned to Fed’s announcements as an eventual rate hike will lead to an outflow of foreign institutional investments (FII) from India and put downward pressure on the rupee. “But lot of it has been discounted and the rupee may not see a sharp fall,” said Harihar Krishnamoorthy, treasurer at FirstRand Bank.

On the other hand if Bank of Japan, which is also following unconventional monetary policy of injection free money into the market, decides to keep the policy in place the rupee may appreciate.

“The value of the rupee moves with demand and supply. Today, we see the trade deficit (imports minus exports) has stabilised at around $6-7 billion and is expected to be similar in the next 4-5 months. The FII (foreign institutional investors) behaviour has been good for the last three months, foreign exchange reserves are also at an all-time high of $371 billion. So, it’s positive for our markets,” Krishnamoorthy added.

There are concerns at home too. FCNR (Foreign Currency Non-Resident Deposits) worth $26 billion taken by banks three years ago are set to mature by December and their repayments will lead to depletion see some negative pressure on the rupee.

The FCNR scheme under which banks were allowed to bring in foreign currency deposit at concessional rates was put in place by the Reserve Bank of India to ease pressure on the rupee in the wake of US Fed’s announcement to taper its easy money policy.

Additionally, last week’s speculation about a devaluation of the currency pulled down the rupee to a two-week low against the dollar. However, government has allayed the concerns saying the rupee would be market determined and the government will not intervene to decide its level.

Hariprasad MP, treasury head at Centrum Direct said, “Devaluing rupee is definitely have a negative impact on the rupee and it could go to 69-70. However, in the current circumstances, we expect it to remain in the broad range of 66.50 to 68.50 against the dollar.”