Rexit may send rupee into tailspin, experts say FCNR outflow no risk

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NEW DELHI: The rupee is likely to take a tumble on Monday after RBI Governor Raghuram Rajan this weekend announced his plans to not take an extension at the central bank and return to academics.

The event, dubbed as Rexit, came as it did just ahead of the Brexit vote and can trigger a 30-40 paise downside in the domestic currency when it resumes trade on Monday.

Currency experts believe given the timing, the development came at the worst time for the currency market. However, they believe the rupee may recover in a week after clarity emerges on Brexit. Overall, they see the rupee testing its all-time low level by the end of 2016.

Kishore Narne, Associate Director, Business Head-Commodities & Currencies, Motilal Oswal, told ETMarkets.com: “There could be a kneejerk reaction on Monday morning, but there are many things which are at stake, including the Brexit vote. Until the government announces Rajan’s successor, the rupee may stay under pressure. If global Markets remain stable, we may see a 30-40 paise reaction during the day. I am not sure if it falls by 60-70 paise.”

Narne expects the rupee to hit an all-time low of 69-70 level by the end of 2016, given the likely rise in inflation on rising crude and food prices. In case the monsoon fails this time as well, the rupee may test even the 72 level, he said.

Another pertinent issue for the coming months is the forthcoming FCNR redemption, which entails outflow of around $20 billion between September and November, which turns out to be almost three times the outflow usually witnessed over a three-month period.
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“That said, major central banks globally are still adopting the policy of low to negative interest rates and that would provide support to the domestic currency to some extent. “Overall, this may turn out to be a challenging period for the domestic currency,” Sugandha Sachdeva, AVP & In charge- Metals, Energy & Currency Research at Religare Commodities said.

What is $20 billion out of $370 billion forex? Basin asked.

“You will be saving 4 per cent in interest rate outflow, which means a $800 million savings. It is just a phobia. There is nothing like a one-man army, RBI is an institution. Rajan has been an exemplary governor, no doubt, but it has always been a team effort,” he said.

Arvind Chari, who heads fixed income and alternative products at Quantum Advisors, said, “There would be serious short-term impact on the rupee and bonds. Rajan to his credit has institutionalised the working at RBI and prepared India to tackle the worst, including the looming Brexit and FCNR redemption.”

The RBI governor’s impression on the foreign investors is very well-received, said Sanjiv Basin, EVP- Markets, IIFL.

“You could see the rupee come under pressure on Monday. But RBI itself has so much of ammunition and reserves that this would be a temporary blip. There would be some nervousness over Brexit. It would be a perfect storm. There would be speculation over Brexit over the next four days,” Bashin said.

Sugandha Sachdeva, pointed out that it was Rajan who brought in a lot of measures to ensure stability in the rupee, when the currency was ruling at an all-time low in 2013.

“He has been in for a stable rupee, and repeatedly said that he was not targeting any particular level for the Indian currency, but was focused on curbing excess volatility. His surprising move to step down just before the Britain’s EU referendum would surely hurt sentiments in the immediate short term,” Sachdeva said.

“We anticipate high volatility in the domestic unit during the coming week, when it is expected to move in the 66.50-67.70 band. Over the medium term, 66 is a big hurdle on the upside. On the downside, in case 67.70 is pierced through, we may even see it hitting record lows,” she said.