Exporters should hedge their inflows, while importers may book dollars only as per their immediate needs.
Devarsh Vakil
The Indian rupee is stuck in a narrow range near 76 against the US dollar for the last three months. The rupee digested many blows though refused to depreciate much beyond 76 levels in June. The historic seasonal trend suggests that the rupee usually remains calm in the month of July.
The Indo-China border dispute, a severe bout of correction in global equity markets, US -China trade worries, downgrade of India's long-term foreign and local currency credit rating – no amount of potentially damaging triggers could dislodge the rupee in June.
India's forex reserves have crossed an unprecedented mark — over half trillion USD — placing India only behind China and Japan in Asia. This is equivalent to almost 12 months of India's import and it gives enormous comfort to investors against fears of a sudden bout of depreciation.
As imports have fallen much more drastically than exports, India recorded a current account surplus of $0.6 billion, or 0.1 percent of GDP, for the January-March period as against a deficit of $4.6 billion (0.7 percent of GDP) in the year-ago period.
On paper it looks good, though it is actually a matter of concern. This primarily reflects India's economic slowdown, which has significantly reduced non-oil and non-precious metals imports during FY20.
The recent cautious stance on the economic recovery by the IMF will hardly generate any surprise in forex markets. Central bankers are offering unprecedented liquidity support to markets and economies.
The US Federal Reserve balance sheet size rose to $7.01 trillion, the three-month annualised growth rate of interest-bearing assets on the Fed's balance sheet stands at 540 percent.
Apart from the US, we have seen ECB and Japan also expanded their balance sheets to 52.35 percent and 118.74 percent of GDP, respectively.
With less than 100 trading days left until the 2020 US presidential election, we have taken a closer look at how the dollar has performed around the past election.
For the dollar it matters less who wins the elections as the it tends to strengthen in months following the presidential vote regardless of the winning party. However, history suggests a Democrat win triggers a dollar rally.
Global equity markets are resiliently shrugging off concerns of virus spread. Foreign institutional investors are putting their money back to work in Indian equity markets after a sharp selloff in the last quarter. Fund inflows into Indian equity markets for June inched up to almost $3 billion.
The relatively narrow range of the USD/INR is a boon for speculators. We expect the rupee to exhibit appreciating tendencies in July. As we advised last month, exporters should hedge their inflows, while importers may book dollars only as per their immediate needs.
(The author is Deputy Head of Retail Research at HDFC Securities.)
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