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Brexit: Rupee may escape currency bloodbath with minor injuries

By Anup Roy & Abhijit Lele
June 25, 2016 03:50 IST
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Rupee is seen to remain in the range of 67.50-68.80 in the short-term

The rupee could possibly weather the Brexit storm in a much better fashion than its global peers, aided by intervention by the Reserve Bank of India (RBI), on a day when most emerging market currencies witnessed huge losses and the pound witnessed a bloodbath as a reaction to Britain exiting the European Union (EU).

Well-timed communication by the central bank also helped the rupee correct its course and the market now expects the rupee to remain relatively stable, as in the short term, some blip could be seen.

In case there is volatility in the exchange rate, RBI has enough ammunition, said Governor Raghuram Rajan in television interviews and later in a statement. Rajan expects to see lower swings on the bond market compared with other countries, and would not “worry overtly on Brexit in the short term”. At the same time, RBI would not want to minimise the impact of the Brexit, he said.

“RBI is watching all the markets, and is ready to act when there is a disorderly behaviour of those markets that we are concerned about — bond, currency and money markets,” he told television channel CNBC-TV18.

In a statement, Rajan said: “The Indian economy has good fundamentals, low short-term external debt, and sizeable foreign reserves. These should stand the country in good stead in the days to come. RBI is continuously maintaining a close vigil on the market developments, both domestically and internationally, and will take all necessary steps to ensure orderly conditions in financial markets.”

India’s foreign exchange (forex) reserves stood at a record high of $363.8 billion as on 17 June, showed data released on Friday. The rupee closed at 67.97 against the dollar, down 1.06 per cent, but strengthened 1.90 per cent against the euro and gained 7.51 per cent against the pound sterling.

At the time of market close in India, all Asian currencies were down against the dollar except for the Japanese yen. The fall was led by South Korean won, losing 2.44 per cent. The dollar index, which measures the greenback’s strength against global major currencies rose 2.20 per cent to 95.58.

In a conference call with media after the EU referendum results were declared, Rajan said the extent of hedging foreign exchange exposures has gone up, reflecting the effect of RBI’s insistence to use financial instruments to cover forex risks. The foreign exchange borrowings by Indian companies have come down in the past few quarters, he added.

Rajan’s confidence in the rupee is shared by other market players as well.

“Currency in the near term will be watched. In the short term, investors would be looking for safety but the real fear is that noise from Europe will keep coming as other countries will ask for their own referendum,” said Piyush Wadhwa, senior director and head of financial markets at IDFC Bank Ltd.

Wadhwa expects the rupee to remain in the range of 67.50-68.80 in the short term, he said, adding, “bonds should remain stable and mostly track news on the next governor.”

According to A V Rajwade, senior currency consultant and commentator, impact on rupee would not be as much as was feared.

“I don’t see much of an impact on India or on the rupee. EU is our largest trading partner after China and the US, and trade with Britain is not substantial. Rather than Brexit, what matters more for the rupee now is who becomes the next RBI governor and what kind of policies he is going to follow,” Rajwade said.

The 10-year bond yield closed at 7.47 per cent from its opening level of 7.50 per cent on the Brexit development. In volatile times, investors move to fixed income securities, making the prices of bonds rise and yields fall.

Japan’s Nomura in a report said that in India, Brexit’s impact could be a slowing of growth but economic prospects remained relatively “sanguine due to the impact of local factors such as a strong monsoon, the impact of pay increases and higher public capex (capital expenditure).”

“The UK and Europe constitute a significant part of INR’s effective exchange rate (23.7 per cent) and further equity market weakness and foreign investor outflows could weigh on INR, as could further rate cuts from the RBI,” Nomura said.

Brexit, in the long run, could be good for India, said State Bank of India Chief Economist Soumya Kanti Ghosh. “India’s trade with the EU and Britain will both rise. England is perhaps the only country that has a dedicated minister to look after only India-Britain trade. This indicates the UK was anticipating Brexit and made preparations for increasing trade with India. This will be good for the rupee in the long run,” Ghosh said.

Minister of State for Finance Jayant Sinha told TV channels they were focusing on the market dislocations caused by Brexit, but it was too early to assess the impact on trade.

“There’s going to be market dislocation and we are going to have to focus on that,” Sinha said.

Photograph: PTI

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Anup Roy & Abhijit Lele in Mumbai
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