Many of you may still remember how badly the Indian rupee was crushed during this time of the year in 2013. Thereafter situation improved thanks to the efforts of RBI and improving investors' sentiment about India. If you think rupee may strengthen going forward on the expectation of economic recovery, you may be surprised to know that it may not be an easy journey for INR.

Here is why…

The dollar index which measures the strength of U.S. dollar against a basket of some major currencies of the world, has recently hit a 14-month high. Moreover, U.S. dollar rose to a 6-year high against Japanese Yen. The Indian rupee has been relatively stable, but, following the global cues it lost about 2.7% over last 3 months and recently lost about 0.52% in a single trading day.
 

Tough times ahead?

Data as on September 09, 2014
(ACE MF, PersonalFN research)
There are several factors that have been driving the dollar up, such as:
 

• Withdrawal of stimulus package in a phased manner by the U.S Federal Reserve (Fed);
   
• Possibility of an early interest rate hike in the U.S.;
   
• Expectation of better performance by the U.S. economy;
   
• Launch of a new stimulus package by European Central bank (which pushed Euro down against the U.S. dollar);
   
• A surprise rate cut by ECB; and
   
• Weakness of Japanese Yen due to lacklustre performance of Japanese economy and sagging economic indicators
   

So, these are some of the prominent factors that have pushed the U.S. dollar up sharply.

How is India placed?
India's foreign exchange reserves touched a 3-Year high in August 2014. The RBI has been buying the U.S. dollar relentlessly to protect the Indian rupee against sudden outflows. This has put India in a much stronger position than a year back. Another factor that is turning out to be a boon for India has been falling crude oil prices.

Falling crude oil prices lower the India's import bill as the nation imports about 80% of its energy requirements. The Current Account Deficit (CAD) which was a major attributor in the fall of Indian rupee last year, has narrowed substantially in the April-June quarter of the current fiscal. You see, narrowed CAD denotes that India now owes lesser U.S. dollars to the world against it obligations. Also softening crude oil prices also help Government save on oil subsidies and channelise money to developmental initiatives.

It is expected that, the NDA Government would take steps to promote foreign investments in productive sectors of Indian economy. If business confidence improves further and more companies keep coming to India, rupee might be propped even under adverse market conditions. Having said this, timely implementation of announcements remains the key for the Government. If the U.S. economy emerges really stronger, it might give boost to India's exports and rupee may gain. Lagging Europe may remain a drag.

PersonalFN is of the view that, considering various possibilities and different scenario, it appears that, Indian currency may not take a hit as badly as one would expect. Yet, consensuses of monetary policy decisions of western economies cannot be undermined. Any sudden outflow of capital from India may still drag the Indian rupee lower. For now it's wait and watch.

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