Rupee Vs Global Currencies — Where Does India's Currency Stand?

The street is penciling in rupee at 87.50 as Trump 2.0 kicks in and fresh trade tariff forces global currencies to adjust to new normal. There is one thing that every economist on the street agrees on, there is only limited headroom available with any regulator to defend their currencies.

The global currencies started reacting in September, when China began its stimulus process, that saw many of the global currencies re-adjusting to expected Chinese demand and economic revival. But China stimulus has been slow and lacking. This was followed by November's Trump tantrum over tariffs. The Trump tariff tantrum has led to Yen declining to 157 way, beyond the comfort level of Bank of Japan, which will be discussing a possible rate hike at next week's policy meet.

Rupee, while having declined by 3.6% since Sept. 26., has outperformed global currencies. And the impact of this has been felt by the exporters, especially the software companies whose revenues have been hot due to cross currency wind. Euro and pound have declined far more than the rupee and that means the gains against the dollar appreciation of the rupee has been set off by losses against euro and pound revenues.

Dollar rose 7.6% in euro and 9.06% against the pound. Companies with exposure to this geography are likely to see revenue impact, as the rupee has been relatively stronger. This is because the Indian central bank has been defending the rupee, including talking up the rupee off late.

The street is penciling in rupee at 87.50 as Trump 2.0 kicks in and fresh trade tariff forces global currencies to adjust to new normal. There is one thing that every economist on the street agrees on, there is only limited headroom available with any regulator to defend their currencies.

The global currencies started reacting in September, when China began its stimulus process, that saw many of the global currencies re-adjusting to expected Chinese demand and economic revival. But China stimulus has been slow and lacking. This was followed by November's Trump tantrum over tariffs. The Trump tariff tantrum has led to Yen declining to 157 way, beyond the comfort level of Bank of Japan, which will be discussing a possible rate hike at next week's policy meet.

Rupee, while having declined by 3.6% since Sept. 26., has outperformed global currencies. And the impact of this has been felt by the exporters, especially the software companies whose revenues have been hot due to cross currency wind. Euro and pound have declined far more than the rupee and that means the gains against the dollar appreciation of the rupee has been set off by losses against euro and pound revenues.

Dollar rose 7.6% in euro and 9.06% against the pound. Companies with exposure to this geography are likely to see revenue impact, as the rupee has been relatively stronger. This is because the Indian central bank has been defending the rupee, including talking up the rupee off late.

China has moved slow on the stimulus as it is keeping the dry powder to counter Trump tariffs, according to experts. In the meanwhile, it has allowed its currency, the yuan, to gradually weaken. The Yuan has weakened by 5.4% since Sept. 26. This does not augur well for the Indian companies as Chinese imports will be cheaper, compared to Indian goods and will add to domestic industry seeking more protection as demand remains subdued.

The bigger challenge is the rising commodity prices, especially oil, which tested $81 a barrel in the last few days. Fresh sanctions on Russian crude industry and declining US crude inventories will keep oil prices elevated, as Asian buyers look at non-Russian crude oil, putting further strain on India's trade deficit.

Four macro global events will determine the future of rupee — pace of Trump tariffs, Fed pause, China's response and Bank of Japan's rate hike.

The policy makers are hoping that external help like the inward remittances that come in January-March quarter and inclusion to the Global Bond Indices will bring in enough dollars to cushion some impact.

The Rupee is headed for a rough ride, brace for impact as the Indian policy maker use all measures in their limited arsenal to smoothen the ride.

As RBI insiders say, it all starts with defending the Rupee.