USDINR Hits Almost 1-Year High

Posted In INR, Minor Pairs, Single Currency, Trading Tweets, USD - By Richard Lee On Monday, August 29th, 2011 With 0 Comments

Since the beginning of 2011, the Indian rupee has gained by about 2.2% against the US dollar. Driven by global investors’ search for higher investment returns, India’s currency has advanced from an exchange rate of 45.05 to the year’s high of 43.95.

But, things have changed now.

Since hitting the year’s low, the USDINR exchange rate has powered back – regaining all of its losses for 2011 and then some – right now trading at 46.16. So, what’s behind this sudden change in sentiment?

For one, the economy is beginning to show signs of a mild slowdown in its pace of expansion. This isn’t good. Rapidly accelerating growth is the reason why international investors took notice of Asia’s third largest economy in the first place. Sure, there’s still a lot of growth left. But, for now, it seems that the economy may be stuck in a rut. Indian economic growth was anticipated to skyrocket in the last 12 months – rising to as high as 9.5% for the year. But, now, gross domestic product is estimated to come in at 7.2% – the third quarterly downward revision. The extraordinary rate of growth would have competed against other global powerhouses like China and Brazil – both expected to expand by 8% and 5% in 2011. What a difference 8 months make. Now, with manufacturing – a key driver to the country’s growth – stalling, it seems that the country won’t grow as high as earlier thought.

According to the Purchasing Managers Index, manufacturing activity in India slowed to the lowest level in almost 2 years in July. The disappointing economic tidbit followed a decline in June’s number – which was barely above the expansionary 50 mark at 55.3. Declines in output will no-doubt affect spending habits by both businesses and consumers in the short term – negatively impacting overall growth.

But, it’s not just a slower economy that’s giving rupee traders a second thought.

Since the beginning of 2010, the Reserve Bank of India has continued on an aggressive campaign to stamp out rampant inflation in India. Rates of inflation have declined since topping out in the beginning of 2010, but still remain relatively high compared to other Asian economies. With average inflation of almost 10% overt the last two years, central bankers have had to increase interest rates 11 times. But, now with those rate hikes actually making their way through the economy, it seems that RBI Governor Duvvuri Subarrao is running out of reasons to increase benchmarks anymore. Interest rates in India are currently at 8%, almost double the Reserve Bank of Australia’s rate of 4.75%.

Without interest rates moving higher, global investors who have already bought into the country’s assets may be considering lessening their load a bit into the last four months of 2011.

And rates are expected to stay there or move lower, according to money market estimates. Traders have begun to anticipate a rate cut of about 25 basis points or 0.25% in the next 12 months.

As before, I’m not saying that India’s growth campaign is a done deal – it’s not. But, given the medium term growth picture and the likelihood that interest rates will come down, the country’s currency may be under a bit of pressure in the coming weeks as traders reevaluate their positions.