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After the gathering of Santa Claus, the rupee may see some correction. What awaits the markets?

NEW DELHI: For those who bet on Indian currency, December 2021 was an embodiment of the term “rags to wealth”.

From rushing to the unenviable label of Asia’s worst performing currency, the local currency recorded a remarkable turnaround during the second half of the month as the Reserve Bank of India blocked speculation against the rupee by displaying its formidable arsenal of foreign exchange reserves.

The U.S. Federal Reserve’s unequivocal tilt in favor of tightening monetary policy managed to deliver 1.1 percent gains against the dollar for the month and came out largely unscathed for the quarter as well, recording a drop of just 0.14 percent against the greenback in October. December.

The degree to which the rupee’s fortune fluctuates can be gauged by the fact that in the previous quarter, up to the first half of December, the rupee lost 2.6% against the dollar as the Fed reported several rate hikes in 2022. The national currency plunged to its lowest level in 18 months at 76.23 / $ 1 on December 15.

The promise of higher interest rates in the world’s largest economy has prompted foreign investors to rush to reduce their holdings of emerging market assets, with REITs making net sales of Rs 38,521 crore in the Indian stock market in October-December.

However, as of December 15, as the RBI began to spend its huge foreign exchange reserves, the rupee recouped all of those losses, ending the calendar year at $ 74.33 / 1.

What is telling is that the national currency continues to show resilience against the dollar even as the minutes of the Fed meeting in December hint at a faster pace of US interest rate hikes. .

This, at a time when the strength of the rupee can no longer be ignored as being mainly driven by low year-end volumes. On Thursday, the national currency stood at 74.49 / $ 1.

Fed hikes but no crises
While low volumes and some factors such as year-end exporters’ requirements played a role in the rupee’s recent rally, ETMarkets sat down with a few experts to assess what lies ahead and which sectors could win or lose.

The consensus appears to be that the rupee could see some correction in the last quarter of the current fiscal year, mainly due to still high monthly trade deficits and the start of rate hikes in the United States.

Provisional data shows India’s trade deficit has continued to grow, reaching around $ 22 billion in December, not far from the record high of $ 23 billion a month ago.

While exports grew 37 percent year-on-year in December from 27.2 percent in November, imports remained robust, registering a 38.1 percent year-on-year increase in December.

Despite these factors, however, the national currency should not lose its moorings, as there are reasons for optimism.

“There is a risk of a slightly stronger rupee because the first quarter (January-March) is generally a positive quarter from a trade deficit perspective as well as REIT inflows,” said Anubhuti Sahay, head of Standard Chartered Bank economic research for South Asia.

“What we’ll need to watch closely is the story of the dollar, especially as the market focuses on how quickly the Fed might go and start raising rates.”

Sahay expects the rupee to end the year at 75.50 / $ 1.

REITs typically make new investment allocations at the start of the calendar year, and while the US may be pegged for higher rates, there is a compelling reason for these investors not to delist India. – the prospect of national sovereign bonds being included in world indices.

The inclusion of the global index, which could attract foreign flows worth around $ 35-45 billion over one year, is expected to be widely announced in early 2022, with many expecting the government details something to this effect in the Union budget on February 1.

Another point raised by experts was the comfort range for the rupee that the RBI currently appears to prefer.

The central bank, which currently holds around $ 635 billion in foreign exchange reserves, may currently seek to ensure that excessive volatility does not exacerbate REIT apprehension amid signs of tightening in markets. advanced economies.

A depreciating rupee eats away at the returns that REITs earn on their investments in Indian assets.

“The market thinks the RBI has intervened on the other side (by buying dollars) at levels of 74.20 / $ 1; the RBI credibly reported that right now 74.00-74.50 / $ 1 is what they like… I see the rupee at 74.50-76.00 / $ 1 by the end March, ”said Abheek Barua, chief economist of HDFC Bank.

From a stock market perspective, while a weaker currency has traditionally boosted the shares of export-oriented IT companies, experts believe that the strong correlation that once existed between the exchange rate and earnings has failed. perhaps more to the same degree.

“Today, the dynamism of the global IT outsourcing industry, where every company is keen to embrace digitization and embrace the cloud and technologies such as AI means that the pricing power is firmly on the side of Indian IT providers. Therefore, IT exports should not be affected by a slightly higher rupee, ”commented independent market analyst Ajay Bodke of recent developments in the rupee.

“However, low-margin exports in sectors like gemstones and jewelry, chemicals, some low-value-added engineering products, automotive components, could face headwinds. And these are the sectors. which employ a large number of semi-skilled workers.