Brexit may shake currency markets, send rupee tumbling to 68.40 vs dollar

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As the world awaits the verdict on the UK referendum, the global currency equations look all set to get realigned. If indeed, Britons decide to leave the European Union, the strength in pound and dollar may send rupee to correct to 67.92-68.40 level against the US dollar. However, if the Britain stays in EU, the domestic currency may appreciate to as much as 66.20.
Brexit or Bremain? A close call!
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Early results from Britain’s historic referendum showed a close contest between the two camps, prompting wild swings in the value of the pound. It collapsed over 5 per cent against the US dollar at one stage, its biggest fall in living memory, while the euro slid 1.5 per cent as investors feared for its future.
With results in from the first 13 of 382 voting districts, those in favour of ending Britain’s 43-year membership with EU were on 52.4 per cent of the vote, while those wanting to stay were on 47.6 per cent.
The Reserve Bank of India, however, assured that it will take all necessary measures to ensure orderly conditions amid an expected surge in volatility.
“In case of Brexit, the rupee will be impacted indirectly as pound and euro will turn volatile or may depreciate against the dollar, at the same time, demand for yen and dollar as relatively safer currencies will also increase. A stronger dollar will put pressure on the rupee and we may see it to depreciate further till 67.70-67.90,” said Rohit Gadia, Founder & CEO, CapitalVia Global.
The expert doesn’t expect any major impact if Britain stays within EU.
“As rupee has already witnessed a fall and nothing much is further expected. We may see it to stay neutral or appreciate a bit to 66.80,” added Gadia.
Mustafa Nadeem, CEO, Epic Research believes Bremain scenario will send some relief to the currency given we breach 66.20, which is a crucial support level that will change after almost half a decade.
Beyond Brexit/Bremain
On the domestic front, the currency faces the risk of FCNR-deposits getting matured in September and the absence of Raghuram Rajan in the RBI after his tenure ends in September 04.
Therefore, if you go beyond the Brexit/Bremain scenario, the expert expects the currency to hit an all-time low of 70 against the greenback in the coming 12 months, though in the systematic fashion.
“As far as FCNR deposits are concerned, the RBI doesn’t seem to be in an uncomfortable position. While, some banks, which have sold dollars, may have to forward that to RBI, it would only trigger short term volatility. However, over the longer haul (12 months), the currency may depreciate by 4-6 per cent albeit in a systematic manner rather than violent,” said Mihir Vora- Director and Chief Investment Officer, Max life Insurance.
Foreign-currency non-resident (FCNR) scheme is meant for Non Resident Indians (NRIs) and these are accepted by Indian banks in permitted foreign currencies. Rajan had introduced the scheme in September 2013 to support the rupee fall at a time when the currency was ruling around all-time low.
A large chunk of these deposits will mature in September. The possible shortage of dollar, if NRIs redeem their deposits instead of rolling over, may put pressure on the domestic currency.
In its June monetary policy, the RBI did highlight a possibility of rupee volatility during September-November on account of maturity FCNR deposits, but maintained that rupee liquidity would continue to be supplied as and when required.
“Post Rexit, FCNR coming for resumption is another event that will put pressure on the rupee, but it has been taken care of with adequate reserves and with forex reserves at 363 billion, it will only have a marginal impact,” said Mustafa Nadeem of Epic Research.