Danger of extrapolating too much information from a market which is in a state of panic is never a good thing. It tends to shoot first and ask questions later. Rupee traders are in a similar mood. Within a week, the narrative around the rupee and India has witnessed a sharp reversal.

It is simply alarming how market participants are reacting negatively to economic shocks from commendable structural reforms of the government. It is wrong to say that economic disruption was unexpected. Remember, GST was never just a tax reform, it is a reset in the way business is done in India. It improves tax compliance of a major section of the Indian business community who did not pay their fair share of taxes. We are not surprised that many of them are coming out on media and complaining, as vested interests are always the one who scream when a major structural reform is undertaken because they tend to be at the losing end. Therefore, we hope the government is not deterred by this cacophony of criticism and continues with the good work of reforming the Indian economy.

 Foreign capital

We are not overly worried about the medium-term prospects for the rupee. We continue to believe that strong macro story around real rates, growth and politics would attract long-term foreign capital into India and keep Indian assets and the rupee supported. However, over the next couple of weeks, markets may be driven by short covering demand for the US Dollar and developments surrounding US President Donald Trump’s tax plan. According to various media reports, Trump’s team is expected to propose a tax rate of 20 per cent for corporates, simplified tax code for individuals and corporates, accelerated depreciation for businesses and lower taxes for individuals. If the plan sees the light of day, it can be bullish for the US Dollar.

Over the past couple of weeks, the rupee has suffered this fate due to massive build up in long positions against the US Dollar. Such has been the decline in the rupee that it has now depreciated against 80 per cent of the major currencies in the emerging market space and developed market currencies over September. The weakness in the rupee against the US Dollar can continue for another week or two as the market digests the weakness in local stocks and bonds and a strong US dollar overseas.

Over that time period, a move towards 66.30/80 on spot can be seen. However, traders need to watch for RBI intervention as central banks will be active in containing volatility.

(The writer is a Currency Analyst, Kotak Securities)