THE WAY FORWARD FOR THE INDIAN RUPEE

After depreciating around 12.4 per cent in 2013 and touching an all-time low level of 68.93, the Indian rupee has been trading with a certain amount of volatility and has been appreciating since the start of 2014. There are a host of factors affecting the currency, primary being the forecast for optimistic economic growth along with the newly elected government raising hopes of stability in the Indian economy. The Indian rupee continued its positive momentum on account of the constant inflow of foreign funds in equities and debt markets. The approval of foreign direct investment (FDI) in 13 new sectors has further raised hopes of more foreign funds in the Indian economy.

Besides, the Bhartiya Janta Party (BJP) led by Prime Minister Narendra Modi has revived optimism about economic stability and growth. This growth is evident from the results of the quarter ending June 2014 in which India’s Gross Domestic Product (GDP) grew by 5.7 per cent as against 4.6 per cent in the previous quarter. This increase in economic growth indicated a positive turnaround, in turn leading to an appreciation in the rupee. As far as economic growth is concerned, India’s central banks see recovery in the manufacturing and service sectors.

Meanwhile, manufacturing activity in India advanced by 3.5 per cent in Q2 of 2014 from 1.2 per cent a year ago. The construction sector also expanded 4.8 per cent in the same quarter. The key contributors to the construction sector were the increase in the production of cement and rise in consumption of finished steel which saw a growth of 9.5 per cent and 0.7 per cent respectively. The central bank also hopes that growth in these two sectors in turn will help to achieve the central government’s estimate of real GDP of 5.5 per cent within a likely range of 5 to 6 per cent for 2014-15. The rise in exports, revival of investment, unlocking of stalled projects, ongoing fiscal consolidation releasing resources for private enterprise, external demand pick-up, and the stabilisation of international crude prices will be the key indicators to look forward in the future as drivers to sustain economic growth in the country.

The rising curve of inflation has always been a threat to Indian economy. However, necessary steps by the government to bring inflation under control have helped strengthen the rupee. This is visible in the Consumer Price Index (CPI) which was 8.79 per cent at the start of 2014 but has been plunging over a period of time with the CPI for August 2014 at 7.8 per cent – spelling a remarkable improvement. In addition, the Wholesale Price Index (WPI) inflation has also plunged from 5.11 per cent in January 2014 to 3.74 per cent in August 2014, the lowest level since November 2009. The Reserve Bank of India (RBI) maintains its stance that estimates of CPI will be at 8 per cent by January 2015.

India’s Industrial Production (IIP) has been growing at a slow pace as seen in the data released so far, which states that industrial output remained in the positive territory for four consecutive months (April-July) after slipping into the negative zone in February and March 2014. The IIP grew at 0.5 per cent in July 2014 compared to a rise of 1 per cent in January 2014. Improving economic conditions and growth in industrial and manufacturing activity will be the driving forces for overall consistency and stability in the Indian economy.

Outlook

Controlling inflation has been the prime focus of the Indian government and this has been declining at a slow pace for which the central bank has already pledged that the monetary policy will not be tightened until not reaching the retail inflation target of 8 per cent. Manufacturing and industrial activity is growing at a snail pace but there is scope for improvement in the future considering the new FDI investment lined up for the near future. Good recovery in India’s GDP and high hopes of investors from the new government will boost the investment sentiment in turn the confidence in the economy.

The global economy is evolving at a steady pace as seen in the economic data outputs from major global economies, indicating signs of progress. This in turn will benefit Indian exports and provide a booster to the rupee. The only downside threat to the rupee is in the form of the geo-political tension in the Middle East, Russia and Ukraine which could hamper positivity. In addition, any major surprises from the Euro Zone may push the currency into a negative orbit. Steady inflow of foreign funds due to the increasing confidence of foreign investors in Indian economy and the initiatives by the government to bring the growth trajectory on track will be a boost for the currency. Hence, for the next three months ending 2014, the appreciation in the rupee will continue and we recommend selling MCXSX/NSE USDINR September contract between Rs 61.50 - 61.60, with a Stop Loss of Rs 62.30 and target of Rs 60.00/59.50. (CMP: Rs 61.12).