The famous English economist John Maynard Keynes is known have to have retorted to a critic who pointed out that his predictions and policies changed all too often –“I change my mind when the facts do. What do you do, sir?”
While we (and many others) are not sure if Keynes actually said this, we are sure that many of the facts have changed for us when it comes to predicting the trajectory for the rupee. Turkey for one has turned into a bigger crisis than anticipated, the threat of escalation of a Sino-US trade war has escalated and oil is on the boil again. The current account deficit including the core deficit (net of gold and oil) is likely, going by the current run rate, to be higher than our initial projections
On the domestic front, the intensity of RBI’s intervention has dissipated. While there is complete lack of communication from the RBI, comments from officials from the government and quasi-government agencies appear to give the impression that they support this fall in the rupee’s value in the interests of competitiveness.
In situations like this, it is futile to predict the near term exchange rate. Thus in our forecast we have simply put a technical resistance point as the upper bound. What is important though is that we see the depreciation bias and momentum continuing in the near term and this has implications for exporters, importers and borrowers in FX. This momentum could dissipate if not reverse suddenly and the way to ‘play’ the rupee market in the near term is through continuous monitoring of this momentum bias.
Things could change substantially if the government and the RBI change their mind and see the fall in the currency as a ‘crisis’ that needs to be tackled. There are a number of options open to the central bank to reduce the momentum of the rupee and reverse its trading bias. An out-of-policy rate hike or a scheme to bring in a fresh tranche of NRI deposits figure on this list. Our sense is that these are not on the table at the moment.
Mr. Abheek Barua, Chief Economist, HDFC Bank. Mr. Barua tweets at @AbheekHDFCBank.