Arun Jaitley’s fiscal math averts rupee’s fall to all-time low, but for how long?

The expert expects the rupee to depreciate and test 69.50-70 levels by the end of December. Photo: Reuters

How would you like if rupee turns 70 against dollar? Seems unlikely given the recent rally?

Well, think twice!

Rupee may have gained 138 paise, or 2.01 per cent in last five consecutive days, it is still second worst performing Asian currencies year-to-date after Korean won.

If experts are to be believed, the domestic currency may hit 70 against US dollar by the end of December as Budget euphoria will not stay longer and the currency will get back at the mercy of global headwinds along with US Federal Reserve’s action on interest rates. Not to forget China’s possible yuan devaluation that may engineer a currency war.

“The recent rally in rupee has caught many traders on the wrong foot. In the immediate short term, the overall favorable sentiment that has developed after the budget is likely to continue, but going forward the global headwinds and the Fed rate trajectory will guide the movement of rupee,” told Gaurav Kumar Sharma, Currency Analyst, Religare Securities to Business Today online.

The expert expects the rupee to depreciate and test 69.50-70 levels by the end of December. However, he added it will trade in the range of 66.70-67.60 in the short term.

Standard Chartered Bank, in a post-budget research note, also said the budget is unlikely to have a sustained positive impact on the rupee.

“The Indian rupee (INR) has reacted positively to the budget announcement. However, we do not expect this to be sustained, as the quality of fiscal consolidation is likely to suffer. Also, global rather than domestic factors are likely to dominate the currency in the near term,” said StanC.

It sees 68.25 and 68.00 as support levels for USD-INR spot in the very near term.

However, Jimeet Modi, CEO, SAMCO Securities feels the rupee has hit a major bottom and the rally has just started.

“The Rupee has a made a long-term double bottom at 69.20 in middle of consensus of Rupee touching 72, which makes all the more convincing case that the rupee has made a major bottom and the rally has just started,” told Modi to Business Today online.

The expert added the ongoing rally will sustain at least for short to medium term and the currency is likely to hover around 67 with oscillation of 2 per cent either way in the short term.

Vikas Gupta, Executive Vice President and Chief Investment Officer at ArthVeda Capital hopes rupee does not rally too much since that is not good for the country when all the other emerging market countries are devaluing theirs.

“A lower rupee will be better for exporters.  Since oil prices will remain relatively low, the import bill will not escalate due to rupee being low,” told Gupta to Business Today online.

What explains rupee’s recent strength

A fresh buying in equities post Budget 2016 has spurred the gains in the domestic currency with foreign investors pouring in over Rs 5,000 crore on Dalal Street in just three sessions after Finance Minister Arun Jaitley maintained the fiscal deficit target for fiscal year 2016-17 at 3.5 per cent of GDP.

Gupta said FM Jaitley’s commitment to maintain the fiscal deficit and not let it spiral has definitely been a huge reason for the rupee to stabilize.

Jaitley’s fiscal prudence has also ignited hopes of an interest rate cut by Reserve Bank of India (RBI), which if happens, will boost rupee’s demand. However, Gupta believes post any rate cut, the domestic currency may stabilise and the ongoing appreciation may get halted, or slow down a bit.