Rupee display strong show
Rupee ended the year at 159.83, down 3% from year start, but significantly stronger than the low of 169.50 posted on 27th March 2020. This trend of strengthening was possible due to substantial growth in remittances, exports and multi lateral flows. In fact, Dec exports posted $2.16bn (annualised $26bn). Rupee has also been assisted by lower imports, oil prices and rescheduling of debt, and also due to a weak and bruised dollar in global markets. The Roshan Initiative promises to bring in another $1.2bn in 2021 (having clocked in about $200mn last year).
With this trend, people are curious of the Rupee direction going in to the new year. “There's much going in favour of the Rupee, but eventually the law of averages will catch up,” said a Treasurer of a large bank, referring to the historic average of 6% depreciation of the currency. “We can not ignore the inflation rate differential with our trading partners and the pile up of fiscal deficit,” he added. Indeed most of the analysts Tresmark spoke to projected a retest of 158 level in current quarter after which a gradual weakening could be expected. It is worth mentioning here that inflation (CPI) has registered a decrease, coming down from 9.6% registered in July to 8% in Dec. However, analysts expect inflation to remain under pressure and may witness a peak in May 21 before easing again.
Foreign investment in bonds increased about $77mn in the last 2 months, showing confidence in macros and that they expect interest rates and currency rates to remain stable.
A coronavirus vaccine is the process of being rolled out, a Brexit agreement is in place and President Trump finally signed the stimulus bill into law. The global economic calendar was very quiet with most major markets closed.
Euro has been one of the strongest currencies this year and it is still in demand for a number of reasons. Euro stands to benefit just as much as sterling from a Brexit deal because a breakdown in talks would disrupt economic activity for both regions. UK Prime Minister Johnson caved on the fisheries issuing, giving EU boats uninterrupted access for the next 5.5 years. Strict lockdown measures in France, Italy, Spain and the Netherlands have also slowed the virus curve. These countries are seeing material curve flattening and while it’s too early to tell, we may be seeing improvements in Germany as well.