The dollar-rupee rate could move in the opposite direction if dollar policy rates rise and the FPIs sell in December, says Devangshu Datta.
Illustration: Uttam Ghosh/Rediff.com
This month, forex traders are braced for plenty of volatility across a widely traded basket of currencies.
The Reserve Bank of India (RBI) on Wednesday kept the policy rate unchanged.
The Federal Reserve is expected to hike the US Fed Funds rate at its review on December 12-13.
The Fed may also proceed with unwinding of the bloated balance sheet caused by years of successive Quantitative Easing (QE) programmes.
The handover to a new Fed chairperson will also cause nervousness until there's a sense of policy direction under the new administration.
The European Central Bank (ECB) has a review following immediately on the heels of the Fed and that will be watched carefully for policy direction.
The Bank of Japan (BoJ) also has a policy review on December 20-21. It may also tweak policy, given an improvement in Japan's growth rates.
Both the ECB and the BoJ have ongoing QE programmes, which they are committed to continuing.
Both central banks also have a negative rate structure. The ECB has cut the quantum of its QE bond-buying programme - the BoJ may also look at cutting quantum of QE.
There may also be a change in either rate policy, given inflation upticks in Euro zone and in Japan.
Above and beyond these stances, there is also Brexit.
The Bank of England (BoE) has a monetary policy announcement due on the same day as the ECB.
The BoE is under real pressure. The British economy has been hit in the past six months with slow growth and rising inflation.
The BoE has already raised rates for the first time in more than a decade.
It has also signaled that it will raise rate again, by around 0.5 per cent in the next two years. But, the shape of Brexit is, as yet unclear, and that would clearly influence future decisions from the BoE.
Even if there are no surprises in all these policy reviews, the policy statements will be read and dissected.
Cutbacks on the ongoing QEs would lead to loss of liquidity. That would negatively affect risky assets such as emerging market equity and it could lead to higher yields on hard currency bonds.
The dollar is expected to strengthen if the Fed does hike and none of the other policy stances change.
The pound is expected to come under pressure, pretty much whatever the BoE does.
If either the ECB or the BoJ do tighten the respective QE or hike the respective rate, the respective currency could strengthen and yields in that currency would rise, for sure.
In the past year (since January 2017) the rupee has gained around 5.5 per cent versus the dollar, and gained 1.8 per cent against the JPY.
It has lost three per cent against the pound and lost nearly seven per cent against the Euro.
India's trade deficit and current account deficit have widened in the past two quarters. Exports have grown much slower than imports.
There has been no currency pressure because of portfolio inflows that have boosted the RBI's forex reserves.
Inflows often slow in December as many FPIs (foreign portfolio investors) get set to take the Christmas holidays and close out their accounting year.
The dollar-rupee rate could move in the opposite direction if dollar policy rates rise and the FPIs sell in December.
There is a chance that the rupee might strengthen versus the pound if British currency takes a hammering.
The most intriguing would be the euro rate. The rupee has dropped 1.8 per cent versus the euro in the last month. Would the momentum in euro-rupee reverse?