Rupee likely to trade in 75-77 range against US dollar in till May-end

Vaqarjaved Khan

The rupee appreciated by nearly 4 percent from October-December 2018. The turnaround in rupee was mainly on account of softening crude oil prices which led to domestic inflation cooling down during this phase. The trend reversed in 2019 with the rupee depreciating by nearly 2.15 percent from January-December 2019. The trend continued in 2020 with the rupee depreciating by nearly 6.26 percent from January-May 2020 on the back of lockdown's in major countries across the globe on account of the novel coronavirus.

In order to combat the economic effects of the virus, central bankers across the globe slashed interest rates on an emergency basis. RBI too decided to cut repo rate by 75 bps on March 27, 2020, and in addition to that slashed reverse repo rates by 25 bps on April 17, 2020, in order to combat the effects of the virus on the domestic front. Along with the rate cut RBI has decided to infuse liquidity worth Rs 3.74 lakh crore into the financial system through different tools at disposal with the RBI.

Indian recovery to follow global cues

FY19 Q3 GDP from India came in at 4.5 percent lower by 0.5 percent from Q2 GDP data of 5 percent which was already ailing on account of its domestic weaknesses.

With the advent of this virus growth expectations is likely to get downgraded further in Q4FY20 and FY21 for India.

Meanwhile, IMF slashed India's FY21 growth projections from 5.8 percent in January 2020 to 1.9 percent in FY21 on account of the nationwide lockdown to combat COVID-19. IMF predicts global economy would likely face its worst recession since the Great Depression of 1930. But growth is likely to rebound in India to 7.4 percent in FY22 if economic recovery goes as per plan along with the containment of the virus.

Liquidity injections the key for 2020

In 2019, US Federal Reserve decided to cut rates three times by 25 bps in order to boost business sentiment in the economy. In a turn of unorderly events caused by the global pandemic the US Federal Reserve first slashed the interest rates by 50 bps and then by 100 bps in March 2020 taking the interest rates to 0 percent. The US Federal Reserve will continue to buy $500 billion in US Treasury debt and $200 billion in mortgage-backed securities as well.

Meanwhile, COVID-19 cases have crossed 12,37,000 in US and casualties in the country stands near 72,000. The US too along with the rest of the world had to undergo a lockdown to contain the effects of the virus. This had led to jobless claims rising in the country, the tally currently has crossed 30 million in last 6 weeks.

FII movement the key for Indian Rupee

With lockdown in major economies on account of coronavirus coupled with continuous outflows from the Indian capital markets will possibly lead to depreciation of the Indian rupee.

However, the flow of money of FII would pave the way for Rupee going forward. The outflow of capital by FIIs from the Indian equity market stood at Rs 53,076 crore for the period of January to May 2020. Similarly, there was an outflow of Rs 85,055 crore from the Indian debt market during the same time period.

With global equity markets crashing amid the scare of this global pandemic, Indian equity markets too remains in line with its international counterparts as well.

Meanwhile, the recent gain in Indian equities provided some respite to the ailing Rupee.

Hence, USDINR (CMP: 75.86 on May 6) is likely to move in the range from 75 mark on the lower end and 77 mark on the higher end till the end of May 2020.

The author is Research Associate - Currencies at Angel Broking.