Brent linkage shows rupee to remain rangebound below 72 for rest of 2019


By Ranjan Chakravarty

The USD-INR pair reached its year-to-date low of 72.47 on September 3, unleashing a scramble to explain why there is this fresh ‘weakness’ in the currency. All sorts of things are seen to be impacting the currency. Since we don’t agree with them, we won’t enumerate those factors.

In March 2019, we had cautioned against excessive optimism on the USD-INR paid, when it had breached 68.50. Data has borne out our contentions. This time we are writing, with data, to argue against excessive pessimism.

We expect INR to stay rangebound for the rest of the year between 70.50 and 72.50, with most trades centered between 71.10 and 71.70. In the worst case, driven by exogenous shock, we expect interventions around 74.50 level.

There are two reasons for this. First, we look at the USD-INR pair as non-seasonal and non-random, but driven by strong endogenous mean reversion. Since USD-INR price levels reflect the value of the money stock of a growing domestic consumption and investment-focused economy, it is a fallacy to tie it to policy shocks – internal and external, and equally, to general environmental factors in other emerging markets. There are certain systematic effects that do spill over from global portfolio holdings, but they are rare and happen in extreme cases in India unlike in most other emerging markets.

A mean reversion analysis is equally relevant today, as it was in the first quarter, and leads us to the first cut mean levels of 71.10 to 71.70.

The second element of our analysis is the exogenous driver effect. We have consistently pointed out that the exogenous driver impacting USD-INR with mathematical regularity is the change in the price of Brent crude. The rationale for this is clear: with large external dependency on crude oil prices, volatility clearly flows from Brent to the USD-INR pair.

A study of the highs and lows of the USD-INR pair versus Brent over the past three years reveals patterns and intervals that are quite reassuring. In 2017, the USD-INR pair ranged between 67.94 (actually on Dec 30, 2016) and 63.84 (on Dec 29, 2017) even as Brent depreciated approximately 17.44 per cent with an average closing price of $54.71. In 2018, the USD-INR range was a bit wider, from 73.44 (on Oct 19, 2018) to 63.33 (on Jan 5, 2018). Crude, correspondingly, moved (appreciated) 24.22 per cent for the year, with an average closing price of $71.34.

In comparison, this year, 2019, has given us a range for USD-INR between 68.45 (on July 5, 2019) and 72.47 (on Sept 3, 2019). Brent crude has moved 14.55 per cent with an average closing price of $64.76.

An examination of the heuristic facts above clearly shows that the USD-INR pair follows Brent reasonably well. The ranges of both are quite well mapped, and so are the levels.

Hence, our contention that since Brent is moving in a tight range this year, stronger (from India’s perspective) than 2018, we will most likely not expect the lows of previous year. Similarly, it is not as strong a year as in 2017, so we do not expect the highs of that year.

Both sets of effects bring us to the conclusion which we have already stated: there is no reason to look elsewhere to explain the finality that USD-INR is going to remain rangebound for the rest of 2019.

(The author is Head of Product Strategy at Metropolitan Stock Exchange. Views are his own)





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