What are the factors influencing ₹ exchange rate when issues around macroeconomic fundamentals (growth deceleration) are universal and not India specific? More so, when India is seen to have twin-benefit from domestic expansion & shift of opportunities from China to India...1/n
Most often ₹ behaviour is kind of “lull before storm” - extended calmness to sudden & unexpected bout of weakness, pull back and back to stability at de-rated range; this is the pattern from 45-50 to 75-80 since 2010, not bad given the elevated USD/INR yield differential...2/n
it means that those having long term debt & equity capital exposure of over 5-10 years stand to benefit, while those running short term trade exposures (3-12 months) get caught unaware of unforeseen ₹ collapse! Those who have the knack of foreseeing this stand to benefit...3/n
It’s relevant to have the feel of lumpy demand or supply and extent of @RBI bridge to limit either way volatility; most often RBI-FPI engagement sets the tone - up or down! Fundamentals and it’s impact on CAD & BoP matter for either way hedge strategy influencing liquidity...4/n
India has major task of squeezing CAD and move into sustainable CAS mode like China/Taiwan with the need to stop permanent export of scarce domestic capital; so, mandate for @RBI is to allow gradual depreciation of ₹ to discourage non-essential imports and boost exports...5/n
Given the complex dynamics in play around fundamentals (growth and CAD), liquidity (FPI versus RBI) and one-sided positions (carry trade and unhedged carry-trade & ECB exposures), RBI administration of tolerance range is critical when impact is more often from external cues..6/n
All taken, what’s immediate outlook post pushing 70-71.50 into history? Believe @RBI should be ok with ₹ value at 73.50/75-78.50/80 retaining pull bias into 76.50-80 to keep it attractive for prospective FDIs that could boost exports and get India out of CAD mode...wishful? 7/7
