The Indian rupee lost almost 5.2% since the start of this year, becoming Asia's worst performing currency. Increased demand for US dollar has taken the rupee to its lowest levels in 2018. Strong US economic data and investors’ confidence in inflation boosted the dollar index reach higher.
US Treasury yields surged above 3% mark for the first time since 2014. Investors growing confidence over US inflation numbers, expecting Fed to raise rates further 2 times this year boosted the yields. Diverged monetary policy expectations between Fed and global central banks have favoured the dollar against global currencies.
Surge in crude oil prices amid growing global geo political tensions has also favoured the dollar. In turn, India’s current account deficit increased to Rs 13.69 billion in March from Rs 11.98 billion in February. Foreign investors have pulled out over Rs 15,500 crore from the domestic market in April, the highest in over 16 months. Strong US economic data and robust US corporate results so far have impacted the dollar outflow.
US core CPI index excluding food and energy prices stood at 0.1% in April. US GDP has also risen sharply during Q3 and Q4 previous year but witnessed a mild slowdown in the growth rate in Q1 this year, while annual growth rate is well above the Fed target.
Investors with their early estimates for GDP growth in the second quarter point to a pickup in growth. Meanwhile, until economic data delivers a major downside surprise, the Fed is expected to retain its hawkish stance on policy.
Considering, there will be at least two rate hikes this year from Fed, we expect the yield differential between US 10 and global 10-year to widen further, which should of course favour the USD.
Domestically, investors are concerned about rise in oil prices. The RBI is also expected to retain status quo on interest rates. Considering, these international and domestic factors, we expect the Indian Rupee to weaken to 68.50 levels.
The author is the head of FX Risk Solutions, Karvy Forex & Currencies Pvt Ltd.