As the world eagerly awaits one of the most anticipated Fed meetings, let us have the pulse of how we are placed….
In 1937, the U.S. central bank tightened monetary policy under the belief that the downturn arising from the 1929 Great Depression was over, but its actions tipped the country back into a recession and saw the Dow Jones Industrial Average lost half its value in a year. It is unlikely that fed will risk a 1937 type slump.
But as the US economy gets stronger and the interest rate hike by the US Federal Reserve gets imminent, is India geared up to handle the outflow of foreign money that has been historically ballooning its stock markets? Christine Lagarde,chief of International Monetary Fund (IMF) who is in India on a two-day tour has said that India is well prepared to deal with any rate hike by the US Fed but cautioned that a stronger dollar may have a significant impact on financial systems in India and other emerging markets. A couple of years ago when the US Fed decided to slow down its quantitative easing , the foreign money from India flew at rocket speed and rupee fell to near 69 levels. India's current account deficit (CAD) was a record 4.7% to the GDP ($88 billion) in 2012-13 which compounded the problem. India is much better placed today. Although, CAD for last year was 1.7% and is expected to be at 2.1% for the current fiscal, as Indian economy grows at a scorching pace of 7.2-7.5%.
Inflation, too, has eased paving way for the Reserve Bank of India (RBI) to cut key interest rates twice this year already in a bid to force banks to begin lending to the industry again. Moreover, India's fiscal deficit plan has been spread further. The fiscal deficit target of reaching 3% of GDP is now delayed by a year, to 2017. Amidst all these positive changes since a couple of years ago, only one issue remains: High external debt of roughly $460 billion!
Dollar strength continues…
(Technical chart : Dollar Index monthly from 1999-2015)
On the fundamental front
the case for a stronger dollar remains compelling. Europe has just begun quantitative easing which will keep interest rates low. In some European countries, negative rates will continue to weaken their currencies in relation to the greenback. At the same time, U.S. interest rates are not heading lower. In fact, they are likely to rise on both the short end and long end of the interest rate curve.
Japan continues to mire in a multi-decade malaise. China's growth is slowing and the government has instituted a policy of 'new normal', which targets lower but sustainable growth. Australia and Canada's currencies have been weakening due to downside pressure on commodity prices. This all adds up to a strong case for a continuation of a rally in the U.S. dollar, and the pressure on Rupee will continue. The Reserve Bank of India (RBI) is likely to keep the Indian currency from appreciating against major currencies to give a competitive advantage for Indian exports
Technically
USDINR in the March futures contract holds a strong support at 62.64, so the overall trend in the currency pair is expected to remain positive till the given level holds, while in the upside prices are expected to again re-test levels of above 63 i.e. 63.20 and can even test 63.50 in the next couple of weeks. However, if support at 62.60 is breached, then the local currency will again start strengthening towards 62-62.70 levels.
