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Rupee Has Best Day Since 2016 and More Strength Likely

Thursday’s gain of 56 paise over the dollar market the Indian rupee’s best one-day performance since November 2016. The rupee thrived after oil prices plunged on Wednesday.

Emerging market currencies have been under significant pressure in 2018 and the rupee has been no exception. Now at 68.23 to the dollar, the rupee is down 6.6 percent on the year and continues to trade near historically weak levels; however, forecasters are becoming more optimistic and further strength may be around the corner.

Among those forecasters is Aditya Pugalia of Emirates NBD. Pugalia told Bloomberg this week that he saw the rupee strengthening to 67 per dollar by year-end. Pugalia said that major rupee-negative developments would “dissipate in the medium term.”

Among factors weighing on the rupee this year have been high oil prices, a strong dollar, above-target inflation, an increasing Indian current account deficit and threats to global trade following the Trump administration’s decision to impose tariffs on goods worth several hundred billion dollars.

Speaking on the dollar, Pugalia suggested that it was close to its current cycle high – something we might also say about oil, which has shed more than $5 over the past 48 hours following news that Libya has reopened four oil export terminals, prompting fears of a supply glut. Oil remains India’s largest import and therefore a significant drain on the country’s finances.

On trade, the rupee’s current weak levels should “negate some of the negative implications of tariffs” and India’s deteriorating current account is “still not a concern,” Pugalia said.

Finally, reining in inflation will be the job of the Reserve Bank of India. In June, the bank hiked interest rates for the first time in four years. HSBC is among the major forecasters expecting a further hike in August. “To keep inflation expectations in check, the RBI may need to push rates higher again,” said HSBC’s co-head of Asian economics research, Frederic Neumann.

Please note that the opinions of our authors are their own and do not reflect the opinion of Best Exchange Rates and should not be taken as a reference to buy or sell any financial product.

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