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Salil Datar

Salil Datar, CEO, Essel Forex.

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Forex and Currency Trends of 2018

Inflation is a very common factor that affects forex and inflow of currency in a major way.

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The rupee has outperformed this year. Going by this trend it can be said that the year 2018 shall take a good turn and shall set up a theme depending on how the below mentioned factors shapes up. The year would be driven primarily by the global markets action especially US tax cuts and Fed chair Powel’s way forward course in the coming year, however, India will be measured against its deliverable of the growth rates as predicted post normalisation of GST initial impact as it would be an event of the past with inflation rate holding the key along with the global oil prices playing a critical role in deciding the fate and direction of Indian Rupee.

Rupee, as seen now is already in its favourable bottom out prices with a further downward possibility to 63.00 levels and might see an upside to 66.00 in coming months with US economy getting stronger & India defaulting on its growth commitments.

A few factors affect the state of forex and currency within the country for the year of 2018 are as below:

  • Inflation: Inflation is a very common factor that affects forex and inflow of currency in a major way. The recent uptick in CPI and WPI Inflation led by food, with perishables inflation are higher than the usual seasonal softness in Oct-Nov, due to unseasonal rains. A seasonal correction in food prices is expected to resume December onwards, on the back of arrival of winter crop output and fewer weather related disruptions. However, inflation is seen to remain unsupportive till the third quarter of 2018.
  • Global Oil Prices: The crude oil prices are seen to be elevated now and shall continue even in 2018. The recent reduction in crude production by OPEC along with geopolitical tensions and supply shortages have kept crude oil prices elevated. OPEC reduced output to put a floor under prices. On November 30, 2016, its members agreed to cut production by 1.2 million barrels by January 2017. Prices began rising right after the OPEC announcement. However, the strength in US rig count activity, along with long term higher supplies from Brazil, Canada could limit upside risk. India Crude Basket has rallied by ~30% since Jul-17, but petrol & diesel prices have been revised upwards by less than 10%. Given pressure on fisc, the ability of Government to absorb further rise in crude prices, may be limited. There is an oil price sensitivity of about 10% in crude price that tends to increase in headline CPI by 15bps a second round impact.
  • Inflation breaching 4% target: CPI inflation breached the 4% target by 88 bps in Nov-17 and is looking like to stay above the target levels for a period of next 12 months. So, while the risks for monetary tightening have risen, RBI will most likely maintain its silence in 2018. The upside risks to inflation are balanced by growth concerns, with the economy still remaining in early stages of GST-transition & issues related to it will need to get resolved. For 2017-18, the RBI MPC has projected inflation at an average of 4.5% in the first half of the year and 5% in the second half, higher than 4% projection made in February. The current inflation rate doesn’t calls for a rate hike as the is partly due to statistical impact of HRA adj. and cannot be termed entirely due to the domestic demand conditions.
  • US Policies Monetary Policy: The primary means by which the Fed and, consequently, the next chair will sway mortgage rates is by setting short-term interest rates. When the Fed hikes the Fed Funds rate, it often triggers an indirect increase in mortgage rates. This will have a domino effect on other countries in the world. Powell is widely expected to continue Yellen’s interest-rate policy. But if he were to raise interest rates more quickly and aggressively, that could send rates higher to the detriment of those looking to enter the housing market.
  • Political & domestic events: There are other political and domestic events that have a wide impact on the forex within the country. Such changes can be like an impact of GST to get measured against more specifics deliverables, market to get more demanding wrt to the success of the implementation, upcoming state elections in India, slippage of potential fiscal targets, north Korean escalation and Brexit and its impact on other pairs.

Therefore, the trend in forex and currency in the country in 2018 to watch out for is a wholesome of factors that are within the country and globally.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house

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