India: Decomposing the USDINR moves - ICICI Bank : Treasury Research

We are revising our Rupee forecast and expect it to trade with a floor of 59-60 in the near term.

Our view takes into cognizance a.) confirmation of US economic recovery and b.) elevated crude oil prices amidst geopolitical tension in the MENA region.

Our analysis suggests that INR is more susceptible vis-à-vis other EM currencies to DXY moves and shifts in global risk sentiment on account of higher current account deficit. This is further re-affirmed by the high beta nature of the INR vis-à-vis the Dollar index.

In this regard, we decompose INR moves into Dollar, EM and idiosyncratic/local factors. Our analysis suggests that idiosyncratic factors explain a considerable portion of the recent depreciation pressure in the Rupee. We quantify that local/idiosyncratic factors explain 4.5 units out of the 7 units depreciation in the INR since May 1st 2013. Dollar and EM currencies explain the remaining 2.5 units movement.

We expect the Rupee and global financial markets volatility to subside as domestic macro fundamentals improve going forward.

Against this backdrop, we expect Rupee to trade with a lower bound of 58-59 levels, in the medium term.

Source : Equity Bulls

Keywords