Rupee seen tad up at 83.25/$1 December-end as dollar weakens
Informist, Friday, Dec 1, 2023
By Kabir Sharma and Pratiksha
MUMBAI/NEW DELHI – The rupee is seen rising slightly in December due to broad weakness in the dollar as the US Federal Reserve is widely expected to start cutting interest rates in the first half of 2024. However, strong demand for the greenback from importers is widely expected to stand in the way of any sharp gains for the Indian currency.
The median of an Informist poll of 19 respondents from banks, corporates and brokerages showed the rupee may settle at 83.25 a dollar by the end of December, as against 83.40 at the end of November. Of these, only eight poll participants expect the Indian currency to appreciate beyond 83.20 a dollar.
The ranges provided by most poll respondents for the Indian currency suggest that the Indian unit will continue to witness low volatility during the last month of the year.
The dollar index, which measures the strength of the greenback against a basket of six major currencies, fell over 3% in November after lower-than-expected US inflation in October reinforced expectations that the US Federal Reserve may be done raising interest rates. The US CPI was at 3.2% in October, against expectations of 3.3%, according to economists surveyed by Dow Jones. Sequentially, the index was flat, against an expected rise of 0.1%.
The key economic data and recent comments by Fed officials also fuelled bets that the US Fed may start cutting interest rates by mid-2024. Almost 47% of Fed fund futures traders expect the first rate cut in the world's largest economy by March, according to the CME Group's FedWatch Tool.
However, just like last month, aggressive demand for dollars by oil marketing companies and other importers may keep the rupee from notching up its gains, market participants said.
"So crude is supporting the rupee but overall the trade deficit is there for India, so even crude at these levels will not be able to keep the bill of imports at the lower end," said a dealer with a large state-owned oil company.
India's merchandise imports rose to an all-time high of $65.03 bln in October, driving up the country's trade deficit to a record $31.46 bln.
Market participants expect domestic demand to remain resilient going ahead. India's GDP grew sharply higher than expected at 7.6% in Jul-Sep.
Moreover, foreign portfolio investors typically withdraw funds from emerging markets in December to book profits at the end of the calendar year. This may also weigh on the local currency, according to market players.
Meanwhile, the Reserve Bank of India may continue to prevent the rupee from a runaway depreciation. However, market participants said that the recent movement in the Indian unit suggests that the central bank may be looking at a slow and gradual depreciation in the currency.
"The resistance levels have further shifted to 83.35-83.40 in November as the RBI now permits the rupee to lean towards the depreciating side, taking into account the banking system's liquidity at a 5-year low. Consequently, they are less able to easily sell dollars and buy rupee," said Amit Pabari, managing director, CR Forex.
Market participants said that crude oil prices may consolidate from here on, and may not be a point of concern this month.
On Thursday, the Organization of the Petroleum Exporting Countries and allies agreed to extend the voluntary oil output cuts announced earlier this year, but the quantum fell short of market expectations, pulling crude futures down by over 2%. Saudi Arabia, Russia, and other members of OPEC, who pump more than 40% of the world's oil, agreed to voluntary output cuts of 2.2 mln barrels per day for Jan-Mar of 2024.
However, at least 1.3 mln bpd of those cuts were an extension of the voluntary curbs that Saudi Arabia and Russia already had in place, according to Reuters. Markets had expected an additional cut of 2 mln bpd.
In December, market participants look forward to the US non-farm payroll and inflation data, both of which are scheduled to be released before the Federal Open Market Committee's meeting on Dec 12-13.
"We have the NFP data, which will set the tone for how the situation could be if it is sharp on the upside, then the US CPI, followed by the FOMC," said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank. "If the commentary is hawkish then we can see rupee going to 83.40, but if they follow the same tone as other officials have lately, markets have priced that in," she said.