Where Lies The Bottom Of The Rupee Slide?

The worries of the RBI do not seem to be abating. While the central bank succeeds in attaining one target, it seems to missing the other.

To address the building concerns on the monetary, the RBI has been targeting three major factors. First and foremost has been a fast depreciating rupee, which has breached the crucial 62.50 level against the US dollar today (August 19). For the past few months, we have been bearish about the rupee and have continuously maintained our stance that it will depreciate further. With the downward movement the currency has witnessed in the past few weeks, our stance has been proved right.

However, the crucial question now is where will the rupee stop depreciating? That, of course, is anybody’s guess. While we maintain that there is still a possibility of further downward movement, there are also some definite technical levels for the currency. As per our technical studies, the next downward support for the rupee comes in at the 63.30/USD mark. If this level is broken, one can expect the rupee to touch the 67/USD.

Some leading economists are also of the opinion that the rupee can easily breach the 65/USD mark soon. We concur with this view, as we do not see fundamental factors backing it. We expect FIIs to continue selling in the debt markets and some in the equities too. This would naturally result in a further slide in the currency. As far as the RBI is concerned, the actions taken so far have not been able to arrest the fall. Until the point that it comes out with some stern action plan, the rupee may continue moving down further.

Curbing inflation has been the second target for the RBI. Though it has gained some ground on the inflation front in the past few months, there seem to be some worries surfacing again. Food inflation is moving towards the double-digit mark again, and if this persists, it will be a double whammy for the Indian markets. In simple terms, if inflation rises further, we would not be surprised if RBI increases the repo rate going ahead.

This leads to the third important factor, which is overall growth in the economy. The RBI would have to tread carefully and maintain the right balance here. If it increases the repo rate, it will curtail GDP growth, which is already under pressure on account of various other factors.

The regulator is struggling and we foresee that it may remain only a helpless spectator going ahead. As regards the currency movement, we expect the rupee to breach the 63.50/USD level soon.