The currency confusion!

Many people seem to be confused and worried these days regarding the volatile movement of Rupee vs. the Dollar, especially the IT Professionals and the exporters. I get query from many of my friends who have kept their dollar earnings in their foreign bank accounts hoping to get better exchange rate later. But the recent currency movement has left them scratching their head in anticipation of what to do now. The exporters are also affected but they have the ability to hedge their dollar receivables and are hence comparatively less exposed to these wild swings. I have been asked by many people about what is the future of dollar vis - a - vis the rupee.

Considering the current economic situation in India and worldwide, specially U.S, I believe we should see rupee stabilizing to depreciating from current levels of around 44.50. Some of the facts supporting such belief are:

1. Quantitative easing bottoming out in U.S: The interest rate in U.S have been kept abysmally low for quite long now, and the expectation of another round of easing and thus flushing of around $500 Billion by FEDERAL GOVT.  into the system to boost demand is already priced in the dollar. With no further easing visible in near future, the dollar is expected to start appreciating against other currencies in short to medium term.

2. Rate tightening topping out in India: The RBI was the first among all the emerging economies to reverse the easing process that was happening all over the world in 2008-2009. RBI has been slowly moving the interest rate up since the early 2010 to fight the Inflation Daemon. This rate tightening has started to slowdown the overall economy now. The IIP data of August was unexpectedly low which has left D.Subarao scratching his head, as he is not left with many amours to fight Inflation and fuel growth simultaneously. With no expectation of further rate hike, the rupee will find it difficult to appreciate against dollar from these levels.

3. Widening Trade Deficit: The trade Deficit, which is total import minus total export, is now running at around $13 Billion a month. With oil rising above $80 recently the deficit is expected to get widened from here until and unless government starts incentivizing the export. But at 44.50 to a dollar our export competitiveness has come down considerably vis - a vis other emerging economies. This cycle is itself expected to put lot of pressure on rupee in next 6-12 months.

4. Indian Stock Market Stabilizing: The SENSEX and NIFTY has appreciated a lot in last 2 months. Coupled with the rupee appreciation the FIIs who were lucky to enter India at the start of the year have made double gains. Seeing this many more FIIs started coming recently hoping to reap double benefits of both Equity and Rupee appreciation. But unfortunately both of them seem to be exhausted at these levels and the recent entrants have hardly made any money. So the Short terms FII money which came in to make quick bucks might start moving out and thus put pressure on both Rupee and Equities.

Note: Currency movement is dependent on infinite number of factors and cannot be predicted with high precision. But by reading the economic conditions one can take informed decisions on the direction and not get panicked by volatile movements.