View: RBI policy, US-China trade talks to guide rupee in October

By Gaurang Somaiya

After appreciating over the last few months, the rupee fell to the lowest level in 2019 after data showed economy grew at slowest pace in the last six years, raising expectations of further rate cuts by the Reserve Bank of India.

In this year, the central bank has cut rates four times by 110 basis points with expectations of another rate cut in October. Apart from rate cuts, expectations are that the central bank governor could maintain dovish stance, which will guide the currency in the near future.

In September, the rupee started to appreciate primarily after Finance Minister Nirmala Sitharaman announced corporate tax cut, which not only gave a boost to the currency, but also lead to a sharp rally in the domestic equities.

Domestic equities rallied by an average 4 per cent last month after consolidating in a wide range since the start of the year. The tax rate cut placed India in the competitive spot with other Asian economies, which was cheered by the FIIs, who turned net buyers in the equity segment after remaining on the short side for the last couple of months.

For October, we expect that momentum for the rupee will be triggered after the RBI policy meeting and what stance the central bank adopts in the near future. On the global front, trade talks between the US and China continue to remain in focus and updates from either the US President from the Chinese counterpart will keep the volatility high for major currencies.

Yuan also fell to the lowest level in 11-years, following escalation in trade war between the two major economies and if the currency starts to weaken against the dollar, it could restrict major gains for the rupee. This month, officials of both nations are expected to meet and any clarity on negotiations could support the greenback on lower levels.

Global currencies
Dollar closed almost flat against its major crosses last month and volatility was confined to a narrow range as trade talks between the US and China progressed. During the month, there were a lot of flip-flops on the comments that came in from the US and China, but the dollar witnessed choppiness within the range.

In the next couple of weeks, officials from the US and China are expected to meet in Washington to discuss further course of action and any progress on the same could extend gains for the dollar. Apart from trade talks, the US Federal Reserve has been in focus, especially after comments from the Chairman, who in his July meeting mentioned that the rate cut was just a policy adjustment and not a change in policy cycle.

In September, the Fed decided to cut rates again, but signalled a higher bar to further reductions in borrowing costs. He further added that rate cut was designed “to provide insurance against ongoing risks” including weak global growth and resurgent trade tensions.

We expect that momentum for dollar could be determined if we get more clarity on the trade war front or if economic numbers from the US start to come in better-than-expectation.

Euro continued to remain under pressure and fell for a third successive month after the ECB decided to further trim rates. After remaining status quo since the start of 2016, ECB governor decided to cut deposit rates and also introduced to purchase bonds worth 20 billion euro per month for as long as it deemed necessary.

Additionally, the ECB changed its TLTRO (targeted long-term refinancing operations) rate to provide more favorable bank lending conditions and match that of its refinancing rate. A slowing euro zone economy, persistent low inflation and the US-China trade war had all pointed toward the central bank being forced to inject stimulus. This month, too. we expect momentum for the euro to remain negative and weak economic numbers could continue to keep the currency weighed down against the dollar.

(Gaurang Somaiya is Currency Analyst at MOFSL)