Outlook for the rupee

The currency can stabilise between 68 and 74 until the elections, before resuming the downtrend

It was a roller-coaster ride for the rupee in 2018. The currency plummeted over 14 per cent during the year to record an all-time low of 74.48 against the dollar in October 2018. However, it managed to clawback from these depths, to close 2018 at 69.77, with 8.5 per cent loss.

The year 2019 has not been too good for the rupee so far. The currency has failed to gain momentum and reversed lower again, after making a high of 69.23 against the dollar in early January; it is down about 2 per cent so far this year.

What drove the rupee in 2018 and what’s in store for it in 2019? An analysis.

The drivers in 2018

Crude oil is India’s biggest import component. As such, oil price remained the most important mover of the rupee all through 2018. Brent crude oil prices surging 45 per cent from $60 a barrel to $87 a barrel made India’s oil import bill soar 38 per cent from $10.3 billion in December 2017 to $14.2 billion in October 2018. The trade deficit widened from $14 billion to $17 billion over the same period. As a result, the current account deficit (CAD) rose from $13.7 billion in December 2017 to $19.1 billion in September 2018. The widening twin deficits (trade and current account) dragged the rupee to its all-time low of 74.48 against the dollar by October last year.

However, the crash in oil prices by about 43 per cent from $87 to $50 by December eased the trade deficit towards $13 billion by December. This, in turn, helped the rupee recover from its all-time low towards the end of 2018.

The second major driver of the rupee in 2018 was foreign portfolio investors’ (FPIs) sales in Indian debt and equities. After pumping in a robust $23 billion in the Indian debt segment in 2017, FPIs pulled out $6.9 billion in 2018 — the highest outflow since 2013 and the second highest outflow on record from the data available since 2002. The equity segment saw an outflow for the first time since 2011.

The FPIs sold $4.3 billion in Indian equities last year. Indeed, the combined (debt and equity) outflow of $11.25 billion is the highest recorded from the data available since 2002.

Along with the oil price and the FPI money outflow, the strength of the dollar also weighed on the rupee. Though the US dollar index fell in the initial part of 2018, it managed to reverse sharply higher from February. The index surged 10 per cent from around 88 last February to the current levels of 97.

What’s in store in 2019?

Oil price will continue to largely influence the rupee movement. But the outlook for oil prices remains mixed. The supply glut and weak demand due to slowdown in global growth may keep prices subdued.

The US Energy Information Administration (EIA) forecasts the world oil supply to exceed demand by 0.44 million barrels per day (mbpd) in 2019 and by 0.63 mbpd in 2020. It also expects oil prices this year to remain subdued compared to 2018. Brent crude oil prices are expected to average around $61 a barrel this year and $62 a barrel in 2020; way lower than the average prices of $71 per barrel seen in 2018.

This will keep a lid on the country’s oil import bill and, in turn, stabilise both the current account and trade deficits and avert the sharp depreciation of the rupee against the dollar.

But any further production cuts from the Organization of the Petroleum Exporting Countries (OPEC) and event risks such as the on-going supply disruption from US sanctions on Venezuela may trigger a rise in oil prices.

In such a scenario, the rupee can fall since the currency has a strong negative correlation with oil.

Global slowdown

The other major concern that has been emerging over the last few months is the global economic slowdown. The International Monetary Fund (IMF) has slashed the global growth outlook for 2019 to 3.5 per cent from its earlier forecast of 3.7 per cent. Major economies such as the US, the UK and the European Union (EU) have also cut their growth forecast for 2019.

The Federal Reserve expects US growth to slow down to 2.1 per cent in 2019 after growing at a pace of 2.5 per cent in 2018. Similarly, the EU and the UK’s growth forecasts have also been slashed recently. The Bank of England cut its growth forecast for the UK in 2019 to 1.2 per cent from its earlier projection of 1.7 per cent. The EU, on the other hand, expects the euro zone to grow at a much slower rate of 1.3 per cent, down from its previous forecast of 1.9 per cent growth.

On the one hand, global slowdown can result in low oil demand which, in turn, can bring down the prices. This is a positive for the rupee. On the other hand, the dollar may gain on safe-haven demand in such a scenario. Also, slowdown in the UK and the EU may hit India’s exports as Europe accounts for an average of 20 per cent of India’s total exports and the share of the North American region averages about 17 per cent. So broadly, global slowdown will have a net negative impact on the rupee.

The US rate decision

The Fed has projected two rate hikes for 2019. Any change in the rate hike pace may impact the dollar. The dollar may strengthen if the Fed decides to increase the rates more than two times, in which case the rupee may reverse lower.

Reserves to the rescue

The Reserve Bank of India (RBI) had built a record forex reserves of $426 billion by April 2018. The central bank used these reserves to arrest the rupee fall last year. It has been intervening in the market using the reserves to protect the rupee from a free fall.

This is evident from the consistent selling since April 2018, which brought down the forex reserves from $426 billion in April 2018 to the current levels of $398 billion as on February 8, 2019. Strong reserves may continue to come to the rescue of the rupee in case of any abnormal volatility in currency market.

Event risks

Two major global events could impact the dollar movement — the Brexit and the US-China trade war.

One, increasing uncertainty on finalising the Brexit deal is raising concerns, as the March 29 deadline nears. Two, developments in the on-going trade war between the US and China are likely to influence the global currency movements.

The US had announced that it would double the tariffs on Chinese imports worth $200 billion, which is coming into effect from March 1. There are noises on the US considering to push-back the March 1 deadline by 60 days.

The Presidents of the US and China are expected to meet towards the end of this month. Failure to strike a deal will increase the nervousness in the market and can trigger a sharp sell-off.

There are chances that a trade deal may be negotiated between the two countries before this month end. Failure to reach a deal will result in additional tariffs being imposed by the US on Chinese goods from March 1, 2019.

Uncertainty over both these events will provide support to the dollar as risk aversion rises. So, the rupee can trade under pressure as a result of a strong dollar.

Election and foreign flows

On the domestic front, the upcoming general election in May will impact the rupee. On the one hand, if the current ruling party gets re-elected or a stable government is formed by any party, the market could get a boost. This will create a positive sentiment and increase foreign portfolio flows. However, the quantum of flow will be determined by the global growth outlook and the pace of interest rate hikes from the US.

On the other hand, a mixed outcome from the elections with no majority for any single big party, resulting in the formation of a coalition government, will be negative for the market, which could trigger a strong sell-off. The FPI will also pull-out money from the country at a much faster pace, which can increase the likelihood of the rupee falling to new record lows.


The global growth slowdown can keep the lid on oil prices and provide some breather for the rupee on the deficit front. However, the dollar, which may gain on safe-haven demand, can make the rupee vulnerable while capping the upside.

This, coupled with the outcome of the general election, will determine the trend for the rupee for the second half of the year. Broadly, the rupee may remain range-bound between 68 and 74 until the elections, with the bias on the negative side for the currency to decline below 74 from a medium to long-term perspective.



Though the fundamental picture is mixed for the rupee, the bias is slightly negative from a medium-term perspective

US dollar index

The US dollar index has been broadly range-bound between 94 and 98 since July 2018. It currently heads towards 98 — the upper end of the range. Inability to breach 98 in the coming weeks will trigger a pull-back move to 96 and 94 once again and keep the sideways move intact.

A breakout on either side of 94 or 98 will only determine the direction of the next move for the dollar index. A strong break above 98 will boost the bullish momentum and increase the likelihood of the index revisiting 100 and 101 in the coming months. Such a rally in the US dollar index can keep the rupee under pressure.

On the other hand, if the dollar index declines below 94, it can fall to 92 or even 90. In such a scenario, the rupee can gain strength.

Bullish outlook for crude

Although the fundamental picture is mixed for Brent Crude, on the charts, the outlook is bullish both from a short- and medium-term perspective. The prices are currently testing the near-term resistance level of $66 .

An inverted head and shoulder bullish reversal pattern is visible on the charts. The neckline support of this pattern is around $63. A strong break and a decisive close above $66 will pave way for a fresh rally to $68-$70 or even $72 over the medium term. Such a rally in oil can drag the rupee lower.

Rupee outlook

The rupee has a major resistance at 69 against the dollar. This hurdle has held well by halting the corrective rally that had begun from the all-time low of 74.48 in October 2018. Also, historically, any corrective rally in the rupee from a major low has not breached the 50-61.8 per cent Fibonacci retracement region of the prior fall. This region is in between 69 and 68.

As such, the rupee strengthening beyond 68 is less likely. However, any fresh and sharp fall breaking below the previous low of 74.48 also looks less probable on the charts. Therefore, the rupee can remain range-bound between 68/69 and 74, at least until the general election.

A prolonged sideways move within this range also cannot be ruled out. A breakout on either side of 68 or 74 will then determine the direction of the next move. The bias on the chart remains bearish for a break and fall below 74 towards 76 over the medium to long term.

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