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Will rupee go below 60? No, it will depreciate

(Just when analysts started…)

The rupee has surely made significant gains from its lows of just above 69 against the US dollar. It was at a time when some market players were expecting the currency to hit 70 that the currency began to reverse losses, thanks to the timely intervention by the Reserve Bank. Since then, the currency gained ground to below 61. But again, just when analysts started betting on the currency's revival to below 60 levels, the currency has started to fall again. Today, it is trading near 62, nearly 1-week low against the greenback.

"We may be significantly premature in believing the stability around 61-62 has come to stay," says AV Rajwade, forex and treasury risk Management Consultant.

The stability in the rupee, as analysts have been saying, is largely due to the intervention by the RBI. "For sometime now the demand side has been artificially suppressed because the RBI is meeting the requirements of the oil marketing companies outside the market. Let's not forget that is a fairly large amount. The estimate is about $8-8.5 billion a month, which translates into $400 million a day. In other words, the demand in the market has been suppressed to the extent of $400 million. Can this continue forever," asks Rajwade.

"Somewhere those swaps are going to stop. In fact, last week there were some rumours that they may stop in the next couple of weeks, but then there was a statement by the RBI that they have no plans at the moment," he adds.

Perhaps after a strong rally in the rupee, from 69 to 61 levels, some sort of correction was likely. Would we be seeing more pullback? "The rupee has rebounded strongly and maybe there is going to be a bit of pullback there," says Hans Goetti of Finaport. Experts believe the reversal in the trend that the rupee has shown is also attributed to confidence in policy actions, and so it depends if that confidence builds up or not.

"Earlier we had a set of policy measures that were just not working. Now we have a complete reversal of the scenario in terms of policy, and the currency has responded to policy actions as opposed to not responding to policy actions in the past. So, it is a question of confidence in policy makers, and I think that's where the market is getting help from," says Sunil Garg of JPMorgan.

Given that the US is going to start tapering its quantitative easing programme and the RBI will turn off oil marketing companies' dollar swap window, the upside for the rupee becomes restricted hereon. "When they taper off or when those swaps are stopped, what we are going to have are two different changes in the demand-supply equation in the currency market. Oil companies will have to buy an average of $400 million a day in the market; and not only that, for sometime they will have to buy dollars in the market to honour the second leg of the swap. RBI has sold spot dollar, but bought them in the forward market. When that leg matures, demand will come back into the market," says Rajwade.