Five factors why rupee will stay firm against dollar till year-end

With hopes of interest rate hike by US Federal Reserve (US Fed) taking a backseat for now, and the domestic macroeconomic fundamentals improving, essentially on the back of lower commodity prices overseas, the rupee is likely to defend itself against the dollar in the short term. It may fall to 66-67 level by December-end, say experts.

"I see a mixed scenario for rupee going ahead. Low inflation, RBI's surprise 50 bps cut in interest rates and weakness in dollar index will help rupee in the short term but I don't rule out the prospects of US Fed hike in December, and also China concerns, which will put pressure on the currency. The range that I see is 63.80-66 vs dollar, however, it won't breach 67 in any case," Sugandha Sachdeva, Incharge- Metals, Energy & Currency Research, Religare Securities told Business Today online.

"We believe in remaining period of 2015, tentative range of the rupee will be 64-67 a dollar. It will continue to outperform among emerging market currencies but foreseeable threat to the rupee is China's slowdown. If their condition deteriorate further despite all the efforts taken by the PBoC and their government, It will certainly fund some liquidation from EMs to developed nation, propelling our currency to lose to some extent if not catastrophically," told Tarun Satsangi of Globe Capital Market to Business Today online.

India Ratings, a Fitch Group agency, expects the rupee to trade in the range of 64.50-66.25 in the remainder of 2015-16.

Here are five factors why rupee will stay stable in the remaining period of 2015:

1)  Delayed US Fed rate hike

The US Fed is slated to conduct its Federal Open Market Committee (FOMC) meet on October 27-28. However, the central bank is unlikely to budge on the interest rate front as a slew of US economic data released over the last few days indicated that the US economy is still not out of the woods and that a slowdown in the global outlook, especially in China, as acknowledged by the Fed, could remain a cause of concern.

The recently released Fed minutes suggest that the apex bank was also concerned over a rise in dollar, which could weigh on the US corporate results. Any delay in dollar rate hikes would be positive for emerging markets such as India. It may restrict rupee from falling against the greenback, going ahead.

However, Sachdeva believes there are good chances that the US Fed may go for a rate hike looking at overall US economic data, not just the recent disappointing set of data. While, Satsangi believes Fed will perk up interest rate in the first quarter of calendar year 2016.   

"While, non-farm payroll data for September was disappointing, better-than-expected inflation data revives bets that a rate hike might still come before the end of the year," she said.

2) Hike in FII G-Sec limits

The RBI has recently announced FII holdings in G-Secs will be denominated in rupee terms instead of dollars. The cap will be raised in phases to 5 per cent of outstanding debt by March, 2018. The decision has attracted strong response from foreign investors, who pumped in close to Rs 17,000 crore in October so far, data available with NSDL show. Most of the fresh capital has been infused in the debt market.

The net inflow by foreign portfolio investors (FPIs) in the stock market stood at Rs 3,295 crore between October 1-16 while debt market attracted Rs 13,695 crore, translating into a net inflow of Rs 16,990 crore, depository data show. The buying by FPIs in October is seen following outflows of over Rs 20,000 crore in the preceding two months.

3) Economic revival

The yuan devaluation in the month of August rattled rupee along with other emerging market currencies. But the rupee has emerged as one of the most resilient currencies among all. It had depreciated 3.11 per cent till end-September 2015 (65.74 on September 30), but recovered to 64.78 by October 9.

India Ratings believes that better macroeconomic fundamentals in August 2015 saved the day for the rupee. However, "the readjustments carried out by foreign institutional investors in their portfolios towards the year-end/beginning of 2016 might cause some short-term volatility in the rupee," it said in a note.

GDP growth rate will be more than 7.5 per cent this fiscal. Indirect tax  revenues are showing a positive trend and all these positive indicators point to India's economic revival, finance minister Arun Jaitley  said recently.

"There is scope of increasing GDP by 2 per cent by taking cumulative measures including rationalisation of taxes etc," Jaitley told PTI.

4) Forex reserves

Foreign exchange reserves rose $2.263 billion to $353.069 billion in the week to October 9 on rise in foreign currency assets, according to RBI data. Foreign currency assets, which contribute close to 90 per cent of the reserves, rose $2.2 billion to $329.518 billion. Forex reserves allow RBI to keep the currency stable and reduce the effect of economic shocks. Forex now covers nine months of imports bill, which is higher than Germany's eight months.

5) Current account deficit

Slump in commodity prices, especially Brent crude, will continue to favour India on the current account positions. India, like Indonesia, remains among emerging economies which run currenct account deficit (CAD).

Imports in September were $32.3 bn, lower than the August figure of $33.7 bn. The sequential decline in imports is mainly due to gold, which was $ 2 bn (compared to last 2 month's average of $4 bn).

"Gold imports have certainly declined after rising in the previous month, but non-oil, non-gold imports also witnessed accelerated pace of contraction. All told, while the level of deficit remains extremely contained, continued exports weakness is a concern," said Edelweiss Securities in a note.

"CAD in the June quarter came in at 1.2 per cent of gross domestic product, which is likely to move marginally higher going ahead due to 10th straight month of fall in merchandise exports (24.3 per cent) in September, but it will still be well below the pain threshold of -2.5%, keeping rupee stable. Lower gold demand post festive season will also keep the import bill controlled, easing pressure on CAD. India's macroeconomic indicators are positive, inflation has come down since the new government has taken charge, CAD is under control and the government is  following the fiscal consolidation road map and will stick to the fiscal deficit target," Finance Minister Arun Jaitley told PTI.