The INR has been trading in a narrow range of 75.05-76.15 over the previous month due to low economic activity and trading volumes during the lockdown. While Reliance Jio secured $11 billion in investments, GDP growth fell to 3.1% for the first quarter and may decline by 11.5% for the full year. The fate of the rupee depends on the USD and oil prices, with the USD expected to decline due to large US deficits and economic problems, while oil prices remain volatile. The RBI may allow the rupee to fall to the mid-to-low 74s before engineering a climb back to 76 as economic recovery increases trading volumes.

1. INR Outlook June 2020
The INR has been stuck in a fairly narrow trading range the previous month. The reasons are
well-known: lockdown across the country leading to a dramatic fall in all forms of economic
activity, low trading volumes due to partially closed markets with restricted trading hours
which led to a passive buffeting of the currency with little active interest beyond immediate
exposure cover. 75.05-76.15 covered the range in a month with active RBI involvement to
curb the potential damage of bad news in illiquid conditions.

2. The news was mixed: amongst the horrifying economic data that kept coming out
intermittently was the positive of Reliance Jio securing over USD 11 billion in equity stake
commitments from a host of international investors. On the negative side the falls in GDP
growth for the first quarter (to 3.1%) would seemthe least harmful until we take into
account the statement put out by Pronab Sen, the former Chief Statistical Officer of the
Government of India who went on record saying that the figures may be overstated by “2
lakh crores” (USD 26.5 billion). His is, however, an outlier opinion when it comes to the
forecast for Indian GDP growth for the year- he sees a fall of 11.5% for the full year
providing the lockdown ended on 31st May (which it only did partially).
The fate of the rupee may depend on externalities: the fate of the USD and the fate of oil. I
am still expecting a fall in the overall value of the USD sometime this year. The massive
increase in liquidity availability, the huge stimulus package sending the deficits rocketing,
the massive unemployment numbers in the face of over 1.8 million cases of Covid, the civil
unrest, the escalating trade and political tensions with China and the looming acrimonious
Presidential and Senate elections make the US Dollar a very unpromising bet. It is likely that
they may lose their AAA ratings at some point if indicators worsen. Only the enormous
seigniorage accrued from it being the global currency of trade and finance is keeping it from
being shunned as a troubled currency. Any other currency- even the Euro, would have sunk
under the weight of all these problems.
Oil is a particularly tricky prospect as the possibility of sharp swings still remain in the near
term. The longer term is signalling a move away from fossil fuels and global funds are
shedding their portfolios of oil production holdings. The near term is dependent on political
manoeuvring as much as supply and demand. Cooperation between Opec members and
Opec+ (including Russia) is strained and needs patchwork alliances for short term
alignments of interests. The wild card of Venezuela and Iran always add to the mix.
However, demand is still limping back to normal. It will continue to be subdued even as

3. globally we shift back to normalcy. Road travel is likely to remain sub-par for a few months
as people continue to work from home. Plane travel is near non-existent as countries are
still to lift restrictions on outsiders coming in. So even Aviation fuel will be in low demand.
Voluntary restrictions on supply still have to contend with the overproduction glut of April
and May. So, despite the recent doubling of price from the lows in April oil prices continue
to remain a benign factor in the rupee value.
Of more concern is the rapid changes in the rupee’s valuation vis-à-vis its trading partners
and its competitors. Whilst the rupee has devalued from 70.70 to the USD in January to
75.50 currently- a depreciation of 6.8% (after having briefly touched 77.00), it is still
overvalued according to the REER model used by the RBI with many other trading partners
and competitors also having registered falls in value. This was to be expected and will
probably continue in the near future as countries attempt to claw back lost export volumes
in the midst of a global contraction in trade. In fact, global contraction of growth is the
biggest challenge to the fallen volumes but the easiest weapon to hand is the exchange
rate.
This may be the prime factor in the decision of the RBI whether to intervene or to remain
passive in the likelihood of large inflows sending the dollar down by 2-3% in the month
ahead. The scope for a fall in the USD from local factors is limited primarily to something as
large as the RIL Jio inflows. It is likely that the RBI may allow a fall down to the mid to low
74s before engineering a climb back toward 76 later. The timing is partly dependent upon
the ability of the FX market to regain volume and depth in the post quarantine scenario and
that is a function of corporate interest again reviving.
Much, therefore, is dependent upon the rate of recovery of production and sales. The
economic stimulus package will only be effective once MSMEs start to take advantage of the
credit guarantees and the increase in credit availability is made available to farmers. The
cumulative 115 b.p. cut rates since March will help matters as well. June is expected to see
the base to falling production and if ever there were an occasion to use the phrase ‘green
shoots of recovery’ then this would be it. The monsoon, so important to inflation,
consumption and GDP of India, is expected to be normal or above normal (80% probability
according to the IMD) this year and has already hit the Kerala coast. This will be crucial as
India cannot afford a drought year if economic damage is to be minimised. The expectation
is that India will not be able to avoid a contractionary year. This month- the first as we move
out of quarantine, will be a critical determinant of how it can minimise the damage in the
end.
On the higher side it is equally unlikely that we will see the INR fall past last month’s 77.00
given the low attraction of holding the USD- low rates, excess supply, economic recession
and trade conflicts- just in the immediate future.