Coronavirus Hits India, Will Rupee Decline?

1M Offshore-onshore spread points at its widest, indicating massive unwinding of offshore carry positions.    

Coronavirus outbreak dampens risk sentiment, Emerging markets fall under threat.

• USDINR sprang to life in the last fortnight, breaking through the resistance of 72.00. The depreciation was not much steep as the drag was regardless of the fundamentals and due to the outbreak of a disease called coronavirus. But it may worsen if the vast spread enters India. Other Emerging markets are in the initial stage of becoming the victim of a contagion effect, last occurred in 2018.   

• Any escalation in capital flight from EMs can spook the Rupee. Domestic core inflation has been sticky and if inflation surprises further on the upside, the real rate differential between US and India could narrow, resulting in capital flight. The spread between offshore and onshore forward points is between 10-12p indicating massive unwinding of offshore carry positions.  

• Going ahead, as per seasonality pattern, Rupee ideally should appreciate against USD as corporates would be receiving remittances ahead of FY19-20 closure of accounts. In the last 10 years, The rupee has appreciated seven times against the USD in March. The contagion effect will become the primary driver sidelining other external factors such as dollar index, crude oil, and Yuan if coronavirus turns into a global pandemic. Now is the right time for treasuries to restrategize and reconsider their hedging options.