What Is Driving The Rupee: Everything You Should Know

It has been a tough year for the Rupee. Rupee has weakened against most of its peers in the EM basket as well against almost all major currencies in the developed market block.

How Rupee performed against other EM currencies in 2018 An emerging market currency is driven by an interplay of domestic factors and global factors. Domestic factors can be summarised into three- R/G/P- outlook on real rates, outlook on growth and outlook on politics.

Fortunately for the Rupee, growth has recovered strongly from the twin disruption of Demo-GST last year. RBI has ensured that real rates remain firmly positive by front loading rate hikes. However, political scenario contains seeds of uncertainity. National elections are due in less than a year and a lot is riding on the relection of the incumbent government. Therefore, till elections are over in 2019, we expect the politcal risk premium to remain high.

However, the real worry for the Rupee are mostly global in nature

• Oil prices: India being a major importer of petroleum gets adversely impacted from higher crude oil prices by way of higher inflation and possible strain on government’s finances. Therefore, during era of rising oil prices, global speculators prefer being short currencies like INR, which are primarly dependent on oil imports and be long those currencies, which benefit from rising oil prices

• EM turmoil: Rising interest rates in America and the gradual unwind of its balance sheet is causing strain on balance sheets of EM corporates and EM governments. Add to that political turmoil in several nations. As a result, EM currencies have come under significant selling pressure

• Trade war & China: Though trade war is not going to leave any country unscathed but there can be some who will benefit on an aggregate basis and others who can be badly impacted. America being the biggest provider of global demand, evident from the large current account deficit holds the upper hand over the countries like Germany & China, who lack domestic consumption engine to support growth. As Chinese economy slows so would the EM economies. Bad news for EM currencies