The rupee rose against the dollar for the second straight month, primarily on the back of a broad weakness in the greenback and plunge in global oil prices. In the recent past, the correlation between crude and the rupee has been high, and this month was no different. Despite a softening oil, the local unit was under the grip of high volatility as most market participants treaded with care following uncertainty surrounding the trade war and the US Fed stance on rate hike. The tussle between the RBI and the government also kept investors hooked. The unsavoury discord was out in the open and as a war of words followed, Governor Urjit Patel decided to step down, triggering a sell-off in the currency. In its latest policy review, the RBI held rates unchanged and retained its ‘calibrated tightening’ stance, as widely expected.
The point to note is FII participation has gone up in the last couple of months. Inflows have been to the tune of $1 billion this month and $1.3 billion in November, a sign that FIIs are coming back to Indian markets after being on the sidelines for the whole year. Economic numbers on the domestic front too have not been disappointing, with inflation well within RBI’s target zone. As the New Year starts, most investors will now shift their attention to the general elections, which must be held by May. And rather than economic data, the currency will be more influenced by any reforms announcements by the government. The dollar after rallying for two successive months came under pressure following weaker-than-expected economic numbers, dovish Fed statements and uncertainty related to the trade dispute between Washington and Beijing.
In the recent past, US economic numbers have not been up to the mark. Inflation continues to grow at a steady pace following weakness in global crude oil prices. The Federal Reserve, in line with expectations, raised rates at its December meeting, but comments of the chairman suggest that the central bank could pause on raising rates aggressively, keeping gains restricted for the greenback. The Fed slashed its forecast for inflation and GDP, which triggered a sell-off in the dollar. This month, market participants will be mainly tracking the progress of talks between the US and Chinese leaders. Fed Chairman’s testimony will also take focus as it will set the tone of further rate hikes. Euro has been one of the underperformers in the G10 pack and this year, the currency has fallen by 5 per cent following a broad strength in the dollar for the whole of last year. It is only in the last couple of months, the greenback has started to witness selling pressure at higher level.
For the euro and the pound, Brexit remains a major headwind. Until we get clarity on that front, volatility for both currencies will continue to remain high. In its latest policy statement, the ECB held rates unchanged and decided to halt its 2.6 trillion euro ($3 trillion) bond-buying programme, capping massive monetary support even though the euro-zone economy looks vulnerable again. This month, all eyes will be on ECB policy statement and any hawkish commentary could continue to support the currency at lower levels.