In the last five issues, we have focussed on the intricacies of currency trading in India and how an investor would be able to invest in one of the fastest growing segments in financial markets. Let us now shift our focus on to actual market conditions and what events have been moving the markets in the recent times.
One of the major events that unfolded in the month of December was the US FED’s interest rate decision, wherein they have increased the base rate by 25 basis points and in the accompanying statement and press conference, US FED chairperson Janet Yellen has signalled that the future course of interest rate hikes would be gradual. Markets have reacted in a positive way, which demonstrates how well the FED has prepared the markets for an impending rate hike. This move has removed uncertainty, helping emerging markets like India, which have been under pressure in the run up to the FED hike.
Answering the BIG Question, what next?
The key theme for the currency markets going into 2016 would be the policy divergence among major developed economies and continued pain for emerging economy currencies. With the exception of the Bank of England, most of the major central banks have remained dovish and are expected to continue with an accommodative monetary policy in the next year. US on the other hand, is expected to hike interest rates at least twice in 2016 and another two times in 2017, taking the target rate to 1.5% with the US inflation being in a target rate of 1-2%. Taking this into prospective, we imagine the following scenario’s to unfold in the coming years.
Indian Rupee against the US dollar
Indian rupee has been under pressure for most of 2015, losing close to 7% against the US dollar and hovering around the 67.00/$ level. Indian economy is in a better place as compared to its peers and as compared to itself in 2013 when it plunged to 69.22/$ during the US taper tantrum episode. That being said, it continues to be vulnerable to the overall US dollar strength and global markets’ volatility going into 2016. Sentiment of global investors’ towards India has been positive and is likely to support the investment activity in India and we can expect buying interest for Indian equities and bonds after a brief correction and this could support the Rupee in the long run. In a nutshell, rupee should be seeing new lows beyond the 2013 level but it is likely to consolidate in the 64-66/$ range.
Indian Rupee against the Euro
Looking at individual currencies, Rupee is likely to appreciate the most against the Euro, if the later remains as a funding currency for global investments. 2015 being a pivotal year for the European central bank with fruits of their quantitative easing program blossoming as key metrics in the European economy have shown improvement in the last few months. With the European central bank fighting to keep its currency depreciated and do “whatever it takes” to achieve its target inflation rate of 2%, we can expect further correction in the euro. Indian rupee has appreciated close to 15% against the Euro in this year and the trend is likely to continue in 2016 as well.
Indian Rupee against the British Pound
British pound comes at a distinct second in the currency race this year and is expected to come out of its accommodative monetary policy in the second half of 2016. Economic performance of the Great British pound has been encouraging and has led to speculation in the markets that the Bank of England could be raising its interest rates that remain close to zero, even before the FED. However, a dovish policy outlook in the month of August from the Bank of England, led to continued depreciation of the British currency. Possibility of further depreciation remains high and key risk that would need to be monitored would be the proposed referendum which would decide if the UK would continue to be part for the European Union. An exit from the EU, could lead to a huge sell off in the British currency. Indian rupee has appreciated against the British pound by 2.5% in the year 2015 and the trend is likely to continue.
Indian Rupee against the Japanese YEN
Japan has initiated its own version of quantitative easing, named as Abenomics. The objective was to double the monetary base and to achieve an inflation target of 2%. The results have been mixed and as per the latest statement from the Bank of Japan, achieving the 2% inflation target could take longer than expected. Direction for the Japanese currency depends on how aggressively the Japanese central bank acts to achieve its inflation targets and the overall sentiment in the global markets. Demand for the Japanese currency shoots up during times of uncertainty and could add to the troubles of its central bank. Indian rupee has appreciated against the Yen by 7.65% in this year and we can expect further appreciation of the Indian rupee going into 2016