In the 2018 YTD, rupee depreciated by 5 per cent due to a host of domestic as well as international factors in play. On the domestic front, Indian government fiscal deficit estimates of (2017-18) widened to Rs 4.79 lakh crore versus earlier estimates of Rs.3.5 lakh crore combined with the recent bank frauds that affected investor sentiments.

However, to address this issue, the Reserve Bank of India (RBI) had barred all banks from issuing LOU’S and letters of credit with immediate effect since March 2018 as the fraud was related to these instruments.

Moreover, India’s trade deficit widened to $13.7 billion in March 2018 from $11.98 billion in February 2018 increasing worries for the Indian economy.

Rupee depreciation further accelerated when the US Treasury department added India on their list of currency manipulators along with China and four other countries. In the meanwhile, India’s CPI eased to 4.28 per cent in March 2018 from an earlier yearly high of 5.07 per cent in January 2018. It was the lowest recorded inflation in the last five months. However, this did not help the rupee’s fall.

Dollar index

Rupee depreciation accelerated further on account of the strength in the dollar index which touched a low of 88.6 in February 2018 and high of 92.3 in May 2018. This volatility in the dollar index can be attributed towards several positive as well negative factors that were stretching the dollar index like a pendulum.

There were political uncertainties surrounding US as it was threatening to leave NAFTA in order to get a better deal from its trade partners. Moreover, US President Donald Trump decided to impose tariffs on Chinese goods which led China to retaliate with similar measures and increase the risk of trade war between them.

However, later on both parties decided to talk over the issue when US treasury secretary Steven Mnuchin decided to travel to China in April 2018 to talk about the future of bilateral trade between the two countries.

In the March FOMC meeting, under the Chairperson of Jerome Powell, the US Fed decided to hike interest rates for the first time in 2018 by 0.25 per cent taking interest rates to 1.5-1.75 per cent and gave hints for at least two more rate hikes in 2018.

Also, the follow-up meeting of the US Fed in May 2018 reassured their earlier outlook of at least two hikes in 2018 on the back of a strong increase in inflation as it’s nearing their 2 per cent target. The increase in interest rates can also be attributed towards the strong economic growth and labour market in the region.

On the other side of the globe, geo-political tensions with regard to the US missile attacks on a chemical weapons facility in Syria and uncertainties involved with Russia supporting Syria did not do much to affect the global investor sentiment.

Where is rupee headed in 2018?

Rupee weakness has been very fast (2 per cent) in the past three weeks starting April 16 to May 7 2018, reflecting weak investor sentiment. Major Indian macro factors that supported the rupee last year such as low crude oil prices leading to lower inflation and lower current account deficit can be seen waning away as Brent crude oil prices have already touched $75/barrel and India remains vulnerable to rising crude oil prices.

The overall trade deficit for India from April-March 2017-18 is estimated at $87.17 billion as compared to $47.7 billion during April-March 2016-17 (according to the ministry of commerce of India). Going ahead, if a similar story continues then heavy capital inflows would be required to fund this deficit. Meanwhile, in April 2018 itself, foreign investors had nearly withdrawn $2.3 billion from India’s debt and equity markets.

In the first round of trade talks between the US and China at Beijing, the US demanded that China should cut its trade surplus with the US by $200 billion by the end of 2020 as compared to 2018 levels. Meanwhile, the US is also demanding that China make it easier for US companies to invest in China.

US Treasury yields touched the 3 per cent mark for the first time since January 2014 on the back of optimism that there will be at least two more rate hikes by the FED going forward in 2018. At present, rising domestic inflation FED increasing interest rates may pave the path for RBI needs to increase interest rates in the latter half of 2018. Taking into consideration the factors, we think that the bias for rupee (SPOT: USDINR) is to depreciate towards the 69 mark by the end of 2018.

(The above opinion is for reference only)