Rupee to Go on the Up? Bank Sees Turning Trend

on Aug 3, 2012

Despite its recent steady drop, the Indian rupee may be nearly ready to change its direction and go up, according to B of A Merrill Lynch. The Bank of America has looked at the charts and found evidence for a possibly impending rebound of the Indian currency, the Financial Times reported on Wednesday (August 1). The bank expects the recovery of the rupee soon, seeing a two-month “diamond top” has formed, “indicating a turning trend”. Other technically positive traits can be spotted for the rupee versus the euro and the sterling, argues B of A Merrill Lynch.

Earlier this week and independently from the bank’s forecast, other analysts said that favourable policy decisions from the Reserve Bank of India (RBI), the European Central Bank (ECB) and the Federal Reserve this week might help the rupee retrace higher levels.
On July 27, the rupee closed at 55.34 per dollar with marginal depreciation as compared to the previous week. As global investors shed risky assets on new triggers from the Eurozone, the Indian currency fell to a low of 56.2 against the dollar on Wednesday (August 1). Towards the end of the week, the rupee appreciated, as ECB President Mario Draghi said the bank would take any steps needed to preserve the euro. The investors’ positive expectations, however, turned to disappointment on Friday (August 3), with India’s rupee completing its biggest weekly drop since June, after the nation’s central bank, the ECB and the Federal Reserve refrained from announcing fresh measures to spur growth.

!m[](/uploads/story/228/thumbs/pic1_inline.png)“Triple disappointments for risk traders would be a hard pill to swallow,” an analyst at Edelweiss Financial Advisors Ltd., Vinay Khattar, wrote in a research report released on Friday. He remained sceptical about the potential of the Indian currency’s rebound: “The rupee will continue to face resistance from a stronger dollar.”

The “triple disappointments” also increased investors’ concerns over India’s prospects. The pace of India’s economic growth has slipped to its slowest in nine years. Expectations are being kept in check, especially after the weather office announced rains during the monsoon season remained below average, leading to worries about food inflation and about the impact on rural consumption. Worries over inflation also hampered the monetary response expected on Tuesday (July 31), when the RBI left rates unchanged. The huge electricity failure across the country this week cannot be helping investors’ confidence either.

Apparently, the rupee remains prone to depreciation despite B of A Merrill Lynch’s expectation for a rebound. For now, market participants are awaiting policy action from the government. To build momentum for the rupee, investors would need to see fiscal measures from the government, including action to attract foreign investment, analysts said. No concrete actions have been taken by the government to curtail fuel subsidies or to remove the bottlenecks holding back infrastructure projects. The only action that has been taken by authorities is the liberalisation of elements of the forex markets to encourage inflows and support the rupee, but so far with little effect.