Over the past one year, major currencies of the world recorded a double digit fall against the U.S. Dollar (USD). Stronger than expected recovery in the U.S. and speculations about the Federal Reserve (Fed) reversing its easy monetary policy stance, made the greenback stronger. In such an environment, the Indian Rupee (INR) too has weakened along with some major currencies vis-à-vis the greenback. The INR has touched a 20-Month low (breaching the 64-mark against the USD on May 07, 2015,) and now concerns have re-emerged.
 

Depreciation in some major currencies vs. the U.S. Dollar

Data as on May 07, 2015
(Source: Bloomberg.com, PersonalFN Research)  

But a noteworthy point is, barring the Swiss France, when compared to the other major currencies, the INR has shown some resilience. This is mainly because foreign investors have been evincing confidence in the Indian capital market by the virtue of being pleased by the efforts taken by Modi-led-NDA Government.

However of late, foreign investors seem wary. In the month of May so far, outflows of Foreign Institutional Investors (FIIs) in Indian equities have been the highest since those recorded in August 2013. Likewise inflows under debt market in India have slipped in negative for the first time this May (on monthly basis) since May last year. Foreign investors seem jittered by the following set of events:
 

• The Centre’s unexpected demand for Minimum Alternate Tax (MAT) on capital gains on a retrospective basis;
• Hindrances in passage of vital Bills in the parliament;
• Reforms not being implemented as expected;
• Disappointing corporate earnings; and
• Rise in global crude oil prices
   

So will INR depreciate further more?
As FIIs exit India, the INR is likely to be under pressure. But the situation doesn’t appear to be as scary this time as it may perceive to be.

Now that the CPI inflation has mellowed down to 5.17% in March 2015, the Real Effective Exchange Rate (REER) may show resilience. But the gains would be gradual. REER is the inflation adjusted value of the currency factoring in the inflation differentials among trading partners. India’s REER was trading strong against the most major currencies in the world – and that’s one of the reasons why INR hasn’t witnessed a vehement fall against the USD, when compared to other major currencies. Nevertheless, to stem the rupee from falling too much further, the Reserve Bank of India (RBI) would intervene. In fact, RBI has been buying USD incessantly for last one year. In the calendar year 2014, RBI bought USD worth 82 billion. Also, India’s forex reserves hit an all-time high of USD 343 billion in April 2015; which is expected to provide cushion to the rupee.

So, PersonalFN is of the view that while the INR has fallen, the situation doesn’t look alarming yet. If the trade deficit data continues to benign but with an uptick to exports, there is not much to worry. Nevertheless, extreme volatility in the value of INR may still affect importers and exporters.

The pressure on the rupee would be a temporary event to set a tone for the Indian capital market. FII flows would be mainly guided by implementation of reforms by the Government, passage of vital Bills, taxation policy, direction of crude oil prices and global environment. So you must take cognisance of these facets, but should not desist investing in equity. To manage the volatility, stagger your investments. If you are investing through equity mutual funds, opt for the SIP mode of investing to facilitate rupee-cost averaging and power your portfolio with the benefit of compounding. Moreover while you invest, follow your personalised asset allocation.

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