The Reserve Bank of India will need to watch the Indian rupee’s movement closely in the coming days in light of the recovering US economy and strengthening dollar, CARE Ratings said.
“While the RBI has brought about order in the balance of payments and several components like imports, ECB flows, and FII funds, it would also have to constantly monitor changes in the external account on account of such changes in the currency value,” the ratings agency said. “Given that this strengthening of the dollar is synchronous with the US recovery and likely increase in interest rates, it does need to be watched carefully.”
CARE Ratings ascribed the recent fall in the rupee’s value to optimism surrounding the US economy, and by implication, the US currency.
“The flow of dollars in the USA has reduced given that the fiscal deficit is lowered and the Federal Reserve Bank’s quantitative easing programme has come to an end. This has changed the demand-supply dynamics for the dollar, causing it to strengthen.
“Investors too are looking for investments in countries that are strong and have now tended to move to the US with the expectation of interest rates also going up during 2015,” it said.
The US Federal Reserve had recently ended its program of quantitative easing based on its assessment that the economy there was resilient enough to do without the liquidity infusion.
In addition, the 3.9% GDP growth rate in the third quarter for the UD economy has also led to a movement of money to the dollar, CARE Ratings said.
“The Fed has withdrawn the QE completely on the premise that the economy is picking up and that unemployment levels are low and within acceptable limits. This indicates that the economy is going to record a healthy growth rate from 2015 onwards.
“Also interest rates are expected to increase in mid-2015 with the Fed tracking the inflation numbers. This has been interpreted positively by the market. Further, housing prices have witnessed an increase. Lastly, going by the revised 3.9% GDP growth in Q3 against the previous forecast of 3.5% which came over 4.6% in Q2, there is a clear indication of a turnaround in the economy which is likely to be sustained in the coming quarters too,” it said.
CARE Ratings also pointed out that the Dollar has been rising against international currencies like the Euro and the Chinese Renminbi.
The dollar was trading at 1.38 per Euro in April, but has risen to 1.25 in November.
In addition, lower interest rates in places like China and Japan are also leading to a rise in the value of the dollar.
“The nations with lower growth prospects are attempting to depreciate their currencies to prop up exports and hence this has in turn, helped the dollar to become stronger,” it pointed out.
It pointed out that prices of commodities like gold and oil have also exhibited uncertainty due to the strengthening of the dollar and an apparent weakening of growth momentum in China.
“… the low growth expected in countries like China which cannot be countered by the US recovery. China is the largest consumer of metals and prices have been moving southwards since August.”