Source: Investing.com

 

One measure of the overall USD Index saw the Dollar go from 103 to105 and close at 103.90 during that same period. The only sensible conclusion that can be drawn is that the Indian currency- and in particular- its users, are being sheltered from global ‘turmoil’- unless one wants to conclude that the Rupee is being held in place because of internal turmoil, of which there is little evidence.

 

There is some degree of uncertainty ahead- in this case, the outcome of the general Election shortly, but even that is being taken for granted- one that is favourable to continuing a conducive investment climate. Plus, the ‘tight band’ extends back to September 2023- surely the Rupee wasn’t going through such uncertainty for such a long period.

 

We have examined- in earlier articles, why the Rupee has been held steadfast against the Dollar- uncertainties over US rates being the most overriding factor, but this excessive control over the Indian Rupee threatens the very lesson that the RBI has spent years trying to instil into the market: hedge your businesses against market volatility. They have- in the past, tried to get businesses to report their open FX risks to understand aggregate unhedged FX exposure for the economy as a whole as a means to understand and further manage currency risk and volatility more dynamically. It makes little sense to have tried for over a decade to try to convince importers and exporters to hedge against currency volatility only then to kill all volatility in anticipation of it happening. This is, quite frankly, a counterproductive exercise that will only make those with open exposures passive in reacting to risk and lead to the moral hazard situation witnessed in the US with the ‘Fed Put’ since the time of Alan Greenspan as Chairman.

 

So, the moral hazard issues of RBI micro-managing aside, what are the factors most likely to determine USD-INR movements in March?

 

In the economy, one critical number that everyone looked at as a game changer- the Q3 GDP growth figures which came in at 8.4%, is being disputed as a basis for assessing future growth prospects. As a standalone number it confirms the robust growth data out of India recently which, in turn, also confirms the predictions for India being the fastest growing ‘large’ economy globally for ’23 and into ’24. Typically, this would be a signal for INR strength- especially coupled with the lower trend in inflation that we’ve seen (though December saw a 5.69% print over November’s 5.55% it was still below the 5.87% expectation by the market).

 

But the high growth number is actually misleading: it included in it an unexpected drop in government subsidies which gave a boost to the net indirect tax category which is used in the GDP calculations. This, therefore, represents a one-off boost and- if compensated for in a future quarter, will act as a dampener to growth data. This may be a cynical manipulation of data just ahead of the upcoming general elections to bolster the economic record of the current government but that hasn’t deterred the equity markets from extending the rising streak in shares. Neither has it reduced the governments assessment for GDP growth for the full FY23-24: they’ve upgraded that from 7.3 to 7.6%.

 

The other critical factor- which we mentioned earlier, is US rates. And linked to US rates is, of course, Indian rates. Higher US rates act as an opportunity cost (or borrowing cost for leveraged plays) and investment into India requires the incentive of a sufficiently large interest rate differential to entice or justify flows. And this is where the RBI is playing a waiting game: waiting for the Federal Reserve to make the first move in rates. Data out of India is sufficiently tame to show inflation within the band of comfort for the RBI. And it has a wide band of tolerance (of plus/minus 200 basis points) and sufficient leeway (in times of time spent outside that comfort zone) that it could signal to the economy that rates are headed lower. That signal of intention would be sufficient to give added impetus to the economy when signs are there for a slowdown in growth.

 

A pre-emptive rate cut (ahead of inflation falling in India or before the Fed begins its programme of cuts) seems likely out of the question. RBI Governor Das has already tacitly admitted that they would see when the Fed decided to cut rates as this would play a role in their rate cutting decision- meaning they’ll let the Fed go first. This is beneficial for the Rupee which gets to maintain that interest rate differential rather than see it compress.

 

In the end, the only factor that matters this month is whether the RBI decides to release control or continue to micromanage. The evidence is in favour of the latter. The only difference this month seems to be that the RBI is more comfortable in allowing a downward glide path for the USD-INR pair. Currently hovering above 82.80 we may see a move towards 82.50 this month whereas the topside looks limited to 83.20 at present. Increased flows into India are the key and the data suggests that we’ll get it.