The rupee is back in focus, nearly 10 months after it came under tremendous pressure over fears of currency war, following the surprise devaluation of China's yuan. Last week, it hit a low of 67.77 per dollar, coming close to the all-time low of 68.85 hit in August 2013, when India was in the midst of an economic crisis.
This week, the rupee again came under selling pressure, despite better-than-expected GDP data and a sharp rally in domestic equities. It fell for three straight days before staging a modest recovery over the previous two sessions.
The rupee's recent form has been attributed to speculation about Raghuram Rajan's future as Reserve Bank Governor. 53-year-old Dr Rajan, who has been credited for the relative outperformance in the rupee, will complete his three-year term in September.
But a vicious attack by BJP lawmaker Subramanian Swamy against the RBI chief has left investors and economists confused about Dr Rajan's future.
Though Finance Minister Arun Jaitley has denounced personal attacks on Dr Rajan, the government seems to be in no hurry to take a decision on extending his tenure.
These developments have led to uncertainty among investors, which is pressuring the rupee, traders say.
"RGR (Rajan) should be confirmed for a 2nd term right away to nip all controversies in the bud & remove unnecessary speculation & uncertainty," tweeted Singapore-based fund manager Samir Arora.
RGR should be confirmed for a 2nd term right away to nip all controversies in the bud & remove unnecessary speculation & uncertainty
— Samir Arora (@Iamsamirarora) May 19, 2016
The other big factor, weighing down the rupee, is the rising prospects of a near-term interest rate hike in the US, where the Federal Reserve will meet on June 14-15 to decide its monetary policy.
In recent weeks, global markets have been in a tizzy over what the Fed will do in the near term as relatively upbeat US data have been eclipsed by a still-sluggish global economy and worries over the risk of Britain exiting the European Union.
Noted economist Moses Harding said, "Risk remains on India markets from Fed in June rate-hike mode and RR (Raghuram Rajan) second innings at RBI hang in doubt, which might keep bulls in caution."
Risk remains on #India markets from #FED in June rate-hike mode and RR 2nd innings at #RBI hang in doubt, which might keep bulls in caution!
— Moses Harding (@mosesharding) May 31, 2016
The rupee will also be influenced by redemptions of foreign currency non-resident (FCNR) deposits, scheduled for September-November period. According to Kotak Institutional Equities, nearly $25 billion outflow is expected in these three months, which may lead to substantial volatility in the rupee.
"We note that the risk of maturity mismatches will cause swings in forex reserves and hence rupee liquidity... Consequently, there could be significant pressure on rupee and liquidity," Suvodeep Rakshit of Kotak said.
The confluence of these local and global factors will put the rupee under huge pressure, traders say, who are already bracing for increased volatility in currency markets. It's no surprise that experts from Care Ratings expect the rupee to hit an all-time low of 69 per dollar during the course of this year.
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