The rupee has been in the news in the past month for having strengthened sharply against the dollar. The Indian currency broke the key level of 66 against the dollar in March this year and rallied to the 21-month high of 63.93 in April.
While sharp moves in the rupee-dollar rate have set the market buzzing, the rupee’s movement against other currencies is just as important. For part of the external trade is settled in currencies other than the dollar and rupee competitiveness is determined by the relative movement of other currencies.
Rupee and the majors While the rupee has been strengthening against the dollar recently, it has been growing stronger against major currencies such as the euro and the pound since last year. The euro is down 7 per cent and the pound has declined about 14 per cent against the rupee over the last year. A major trigger for this weakness is the UK’s decision to exit the European Union. Following this event, the Euro had tumbled over 9 per cent from around 75 to 68 against the rupee. The pound fared worse, losing 20 per cent against the rupee from around 100 to 80 levels.
But the UK announcing an early election in June and the outcome of France’s presidential election provided a breather to these currencies in the last few weeks. The pound has recovered from around 80 to current levels of 83 and the euro has bounced from a low of 68 to 70 against the rupee. This suggests that the rupee’s strong run could be coming to a close and the Indian currency may weaken against the euro and the pound in the coming weeks. The euro can move up to 73 and 75 from the current levels of 70. The pound on the other hand can rise from the current levels of 83 to 87 or even 90 against the rupee.
Rupee vs BRICS
The rupee has been a clear under-performer against BRICS nations. The Chinese yuan is the only one among the BRICS to weaken against the rupee; down 9 per cent over the past year. All the other currencies — the South African rand, Brazilian real and the Russian rouble — have strengthened 7-10 per cent against the rupee over the last year.
This is because these three currencies (real, rand and rouble) made a good recovery in 2016 after recording sharp declines against the dollar in 2015. While the real was up 22 per cent, and the rand rose13 per cent, the rouble was up 18 per cent against the dollar in 2016; the rupee was stable between 66 and 68.85 and closed 3 per cent lower that year. A strong rally in commodity prices also aided these currencies.
Currency and trade
The euro and the pound weakening against the rupee impacted exports to Europe. The European Union (EU) accounts for around 21 per cent of India’s exports, on an average. Ministry of Commerce data show that exports to EU countries fell 10 per cent to $44.46 billion in FY15-16 and by another 15 per cent to $37.72 billion in FY16-17 (up to January).
However, export houses sources suggest that the rupee strengthening against majors will not have much impact on India’s overall trade. This is because, most export transactions happen in dollars rather than the other major currencies. So, even a small appreciation in the rupee against the greenback will hit exports badly. The dollar accounts for 60 per cent of export transactions, while the euro and pound account for 20 per cent and 10 per cent of transactions respectively.
Country-wise export data also suggest that the rupee’s performance against the dollar is more significant. The numbers show that the US has consistently remained India’s top export destination over the last 10 years, accounting for an average 20 per cent of the total exports. So the focus is always on where the rupee is headed against the dollar.
Rupee outlook
Crucial resistances are poised for the rupee near its current levels. The levels of 64, 63.85 and 63.6 are the major resistances ahead. The currency is already struggling to breach the psychological 64 mark. Only a strong break above 64 will see it extending the current upmove to 63.85 or 63.6.
However, its strength is expected to be capped at 63.60 and a further rally beyond 63.60 is unlikely if it breaches 64 in the coming days. As such the rupee is more likely to lose momentum going forward and the 66 levels can be revisited over the medium term.