The Indian rupee has lost momentum in 2016 and is now one of the worst performing emerging market currencies. It has depreciated 1.71% year-to-date, unlike in 2015 when it was among the top performing currencies. Analysts cite concerns over lower growth pushing investors toward safer assets like the U.S. dollar. Additionally, issues like fiscal distress, a weak banking sector, and real estate stress are seen as contributing to reduced foreign investment in India and putting downward pressure on the rupee. While the currency had strengthened over 2014-2015, its relative appreciation may have hurt export competitiveness and some further depreciation could be expected.

1. Sliding Rupee Among
Worst EM Currencies
FALL YEAR Indian unit has given a negative return of
1.71% since Jan 1, analysts don't rule out further
weakness

2. Contd…
The rupee seems to have lost some steam, that is, if you go by data on total
investment returns, or even on the basis of pure fundamentals. Unlike the
previous year, the Indian currency has clearly lost the top slot among
emerging markets so far in 2016, as concerns over growth push investors to
park their money in safer places, like the US. The local unit is now one of the
three worst performing EM currencies, yielding a negative return of 1.71%
against 2-5% positive returns by the Malaysian Ringgit, Indonesian Rupiah,
Thai Bhat and the Brazilian Real, show data from Bloomberg.
“The rupee has underperformed some of its emerging markets peers in
2016, but over a longer horizon (2014 or 2015), it had remained
comparatively much stronger,“ said Saugata Bhattacharya, chief economist at
Axis Bank. “This needs to be balanced with incentivising capital inflows, since
the currency return of an investment in India would be lower with a falling
rupee.“

3. Contd…
There's a case for further depreciation as a relatively stronger rupee may
have contributed to a loss of export competitiveness, dealers said. So far this
year, foreign portfolio investors have sold a net of `11,665 crore in domestic
equities versus more than `13,000 crore invested last year during the same
period, show data from NSDL, a depository .
Last year, the rupee's total investment returns were at about 2.5% against
China's 0.20%, marking the local unit as a top performer among emerging
markets peers.
“With fiscal distress and macro weakness, you throw in stress banking and
real estate, two major sectors for the economy,“ said Anindya Banerjee,
currency analyst, Kotak Securities. “In totality, it is a macro story that is now
trying to take the sheen out of the rupee as overseas investors exited India
investments.“

4. Contd…
In terms of Real Effective Exchange Rate, an indicator, the rupee has
appreciated in the past two years, which gives some space for relative
depreciation.
Moreover, in cross currencies, investors were earlier seen going long on
the rupee while going short in other emerging market currencies
suggesting short term bullishness on the local unit. But now, they are
seen squaring off positions with a weakening dollar on the back of mild
US rate hike expectations, dealers said.

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