The home currency has been moving southwards during the past quarter and may continue to slid further thanks to the Indian GDP slowing down. Rupee may further weaken as the latest forecast of growth of gross domestic product (GDP) to six per cent. Moreover, rupee is the only currency in Asia weakening against the US dollar as it fell five per cent from the highest recorded in June this year so far, according to a latest report. The home currency is reeling under selling pressure owing to increasing levels of public debt and a credit crunch among non-bank finance companies (NBFCs).
The rupee on Monday (November 25, 2019) fell three paise and closed at 71.74 per US dollar in line with weaker key global currencies against the greenback, despite a strong rally in financial markets on renewed hopes of trade truce between Washington and Beijing.
Ignoring positive cues
The Indian currency unit traded flat for a better part of the session before slipping into a negative territory. It finally settled at 71.74 on Monday, registering a loss of 3 paise over its previous close. The home currency overlooked a host of encouraging factors including positive news on the US-China trade deal front, Indian government's disinvestment steps to curb fiscal deficit and robust foreign fund inflows. Forex analysts attributed the reason for the weakening rupee mainly to strengthening of US dollar against the key global currencies.
FPIs bullish on Dalal Street
On the equities front, the 30-share BSE Sensex on November 25, ended 529.82 points, or 1.31 per cent, higher at 40,889.23. Similarly, the broader NSE Nifty settled just shy of its life-time closing high of 12,103.05 points on June 3, 2019, up 159.35 points, or 1.34 per cent, at 12,073.75. Foreign investors bought equities worth Rs 960.90 crore on Monday, as per provisional data on BSE.
Put writers turned busy selling at 11,900 and 12,100 strikes. Further short covering of Calls at 11,900 and 12,000 indicate possible further high for Nifty. High Put Open Interest (OI) addition of 30.45 lakh contracts was seen at 12,000 strike followed by 12,050 strike with 10.9 lakh contracts. Once the Nifty breaks12,140, short covering will take the index further high.
The dollar index, which gauges the greenback's strength against a basket of six currencies, rose 0.01 per cent to 98.27. Brent crude futures, the global oil benchmark, traded 0.09 per cent lower at $63.33 per barrel. Meanwhile, the 10-year government bond yield was at 6.47 per cent on Monday.
The Centre last week approved sale of government's stake in blue-chip oil firm BPCL, shipping firm SCI and on land cargo mover Concor as well as decided to cut shareholding in select public sector firms below 51 per cent to boost revenue collections that have been hit by slowing economy.
Analysts are of the view that a trade pact between the US and China is likely by the end of December 2019 after positive statements made by both sides last week. Expectations of positive development in US-China deal helped key indices soar on Monday. Renewed FPI investments further propelled the bullish deals on Dalal Street.
Further, they said that sentiment got a boost from FPIs preferring emerging markets such as India as the recent easy monetary stance of US Fed and ECB has improved liquidity in world markets.
Recently, Moody's Investors Service lowered India’s credit rating outlook to negative. Moody’s attributed the reason to the deeper economic slowdown, while forecasting that it may last longer than it anticipated.
Slowing down of Indian GDP will pose major risk for the country, said forex analysts. Not only fiscal risks, but also value declining in Indian rupee may happen. This will further impact balance of payments (BoP) and fiscal deficit. The poor growth conditions will further dampen the prospects of capital flows and could be a significant negative for the currency.
India's GDP probably slowed to 4.6 per cent in the second quarter of FY20 and this was the least since the first three months of 2013. SBI forecasts that growth may further slide to 4.2 per cent in the quarters to come. The 4.2 per cent GDP growth rate was a record low starting in 2012.
Soaring volume in Re on DGCX
However, rupee is mostly traded on overseas bourse Dubai Gold and Commodities Exchange (DGCX), which is the largest global liquidity pool for Indian Rupee futures trading. The Dubai bourse has been recording highest volumes in rupee futures and other products. The September quarter recorded over 3.7 million contracts on DGCX. The huge volumes in USD-INR are adding to the overall trading turnover on DGCX. Les Male, CEO of DGCX, said that the success was primarily driven by the DGCX’s Rupee (INR) product suite. “Building on its record successes in August, the INR Quanto Futures contract was the standout performer once again, with the index pricing of the Rupee US dollar currency pair concluding last quarter from July to September with more than 3.78 million contracts traded. INR Mini Futures also performed strongly, registering its highest ever monthly average Open Interest (AOI) of 122,003 contracts,” said Male.
DGCX’s recent record volume growth and Open Interest records reflect the strength and depth of our offerings, and increased investor confidence in the Exchange. September quarter achievements were driven by ongoing geo-political instability, including continued uncertainty surrounding Brexit and the US and China trade war.
During the first half of November, DGCX has been declared as 'Exchange of the Year' for 2019. Male attributed winning this award to the DGCX’s growth over the last twelve months. “DGCX’s Indian Rupee products – INR future, Indian Rupee Quanto Future and the INR-USD Options, drove record-breaking performance for DGCX during the qualifying period,” he said.
Easing interest-rate advantage
Rupee is hovering near to the nine-month low of 72.4075 in September. Forex analysts opine that lowering benchmark repurchase rate by 135 basis points (bsp) by RBI in last February has further pulled down Indian rupee. Because, the RBI decision impacted the bond yields and sapped foreign demand for nation's debt. The forex reserves reached to a record level of $448 billion. This prompted RBI to go for dollar purchases to enhance liquidity of rupee. The steep drop of Indian GDP coupled with rate cuts pushed rupee under pressure.
The author is a business journalist with 26 years of experienc