Outlook for rupee continues to remain bleak

Mumbai - The rupee ended off the day’s lows on Monday, tracking a modest recovery in the euro, but outlook for the local unit continues to stay bleak amid weakening macro-economic fundamentals and tapering foreign fund inflows.

The partially convertible rupee closed at 49.15/16 per dollar, off the day’s low of 49.57 but 0.4 percent weaker than Thursday’s close of 48.97/98. The domestic currency market was shut on Friday for half-yearly closing of banks’ accounts.

“There were not much bids for the dollar today with the euro recovering quite a bit from the day’s lows. Dow Jones futures were also seen recovering, so rupee pulled off its lows,” said Ashtosh Raina, head of forex at HDFC Bank.

The euro hit its session’s high of $1.3381, after touching a low of $1.3314 earlier.

The euro was at $1.3340 at local market close, while the index of the dollar was up 0.5 percent against six major currencies was at 78.946 points.

“I feel the rupee will hold above 49 for sometime. The risk factor is the main driving force. Whenever there is risk aversion, rupee is bound to react negatively,” said Hari Chandramgathan, a senior forex dealer with Federal Bank.

Indian shares slumped 1.8 percent to their lowest close in a week on continued foreign fund outflows dictated by global growth worries, in the absence of positive local triggers.

Foreign funds have pulled out more than $350 million so far this year from the Indian equity market that has fallen by about a fifth.

In the currency futures market , the most traded near-month dollar-rupee contracts on the National Stock Exchange, United Stock Exchange and MCX-SX ended at 49.3975, 49.3750 and 49.3925, respectively. The total traded volume on the three exchanges was $5.4 billion.

WORSENING FUNDAMENTALS

India reached 66 percent of its full-year fiscal deficit target just five months into the financial year, reinforcing worries about its ability to stick to the budgeted target for the year that ends in March.

India’s current account deficit (CAD) widened to $14.1 billion in the June quarter, compared with $12 billion in the same period a year ago.

“CAD was disappointing but the key is whether it improves over the coming quarters. Both July and August trade prints have been in double digits, so unless we see the monthly trade deficit revert back to single digits, CAD shall continue to weigh on the currency,” said Priyanka Kishore, a forex strategist with Standard Chartered Bank in Mumbai.

India’s August exports rose 44.25 percent to $24.3 billion from a year earlier, while imports for the month rose 41.82 percent to $38.4 billion, leaving a trade deficit of $14 billion, government data showed.

“However, I think capital flows shall be a bigger source of concern for the rupee over the coming few months rather than trade deficit. If growth continues to slow, imports will come down in tandem with exports or may be even faster. But rupee will not appreciate until FII inflows sustain,” she added.

Standard Chartered Bank expects the rupee to be at 51 to the dollar by end-December and at 49.80 and 48.50 at end-March and end-June, respectively.

Manufacturing growth nearly stalled in September, turning in its weakest showing since March 2009 on slowing output and order growth as a year-and-a-half of interest rate increases and weakening global conditions take a toll on Asia’s third-largest economy.

“The overall picture we are painting is that India’s external position has become increasingly vulnerable to global risk appetite. Further weakness (in rupee) cannot be ruled out,” said Sanjay Mathur, a Singapore-based economist with Royal Bank of Scotland.

Reuters