Rupee approaching inflection point, likely to recover with key hurdle at 74/$

ICICI Securities

Proactive government policy responses, RBI's line of defence to limit rupee depreciation

The rupee has depreciated over 13 percent in 2018. However, with the government and RBI taking measures to counter the rapid depreciation, the rupee is expected to stabilise. With Indian macros still looking stable, rupee depreciation may abate. Also, as the trade war is focused on merchandise exports, India’s surplus services related exports may remain insulated from ongoing trade wars.

Rupee likely to stage recovery as current macros are: a) better than 2013 & (b) better than most EMs

Source: Bloomberg, ICICI Direct Research

Countries with higher (a) inflation & (b) current account deficit and (c) external debt are ones that are most severely impacted currently. The case in point is Argentina, Turkey, South Africa and Brazil. These countries have seen sharp weakness in debt and equity markets as currencies in these countries have lost 20-50 percent of their purchasing power.

India, on these macro variables, is better than many other weaker economies. With inflation still at 4 percent and GDP growth northwards of 8 percent and forex reserves of more than $400 billion (covering 10 months import), the RBI and GoI can experiment with a lot of policy options.

Trade war remains focused on merchandise exports – India should remain insulated due to surplus services export

The recent rupee depreciation is unjustifiable as India's surplus is in services export, which is not targeted in the current trade war.

•> The rupee has lost over 13 percent YTD in 2018. Rupee losses were aggravated since March 2018, when the Trump administration initiated tariffs on Chinese imports. This excess depreciation should abate in the near term.

•> India has surplus in services export, which is positive, as these are not targeted in the current trade war.

•> China has a huge bilateral trade surplus in merchandise with the US unlike India, which is the contentious point in the ongoing trade war.

Rupee nearing inflection point: Another 3 percent depreciation in rupee, likely to witness strong reversal trend

•> The real effective exchange rate (REER) of 36 key trading partners of India has been on a corrective trend resulting in rupee depreciation.

•> The current corrective trend in the rupee has similarities to the taper tantrum decline in EM currencies of 2013 as the impact is mainly confined to emerging markets. In 2013, REER had fallen 8 percent. Currently, REER has fallen 6.5 percent, leaving scope for another 1.5 percent.

•> Rupee depreciation has 2x impact for every percent decline in REER. Hence, another 3 percent decline in the rupee should bring price equality of the 2013 REER decline.

Rupee has shown tendency to appreciate when central bank initiates unconventional measures

Historically, Rupee has shown tendency to appreciate swiftly when RBI has initiated unconventional measures.

•> In current phase as well, measures including raising import duties on non-essential commodities would help Rupee limit sharp declines from present levels.

•> We expect USDINR may find strong resistance near $/74 and could decline towards $/69.5 in medium term.