The Federal Open Market Committee (FOMC) interest rate decision at the end of the month over shadowed the Rupee’s performance from mid-January, as the expected volatility caused by a rising US Dollar (USD) pushed the Indian Rupee (INR) from 66.7981 to 68.05302.

After raising the key US interest rate from 0.25 per cent to 0.50 per cent in December, the currency markets have stayed in an uneasy mood, aggravated by fears over China’s weaker economic performance and losses on all the major Asian stock exchanges. There is chronic uncertainty over the timing of more US interest rate hikes in 2016 that means the price of gold has risen as investors flock to the safe-haven commodity.

Given the weaker INR versus the USD and as gold is one of the most important commodities in the Indian jewellery market, domestic merchants could be facing more short-term obstacles to their profitability and turnover. The current bear market in the INR is likewise reflected in Indian stocks, which are on a downward trend partly due to China’s slowdown.

A weaker Rupee is seen as having a knock-on impact on important sectors like manufacturing and construction, both of which are reliant on Oil to fuel their activities. Although the Oil price has dipped below $30 per barrel, a weaker INR may be cancelling out the benefits to industry brought by lower commodity prices, impacting on affordability and spending power. As the Rupee depreciates, the trend also hits the affordability of other domestic goods like Palm Oil.

Looking ahead to the coming fortnight, the trading markets enter the new month of February and no real changes to the significant trends of China’s slowdown, Oil’s plunge, Gold’s rise and a bullish USD. Barring further central bank intervention, the risks to the INR remain front-and-centre. The Reserve Bank intervened several times in 2015, shoring up the Rupee versus the USD, but as we move further into 2016 the effects are proving to be short lived.

-Jameel Ahmad,

Chief Market Analyst, ForexTime