According to a recent Reuters poll, India’s battered rupee is expected to remain the same for a while, trading near recent record lows over the coming year. However, the Reserve Bank of India is forecast to raise rates in December and once more in 2019.
The rupee has hit repeated record lows against the dollar this year in its worst run since the financial crisis. It is down over 16 percent so far this year, tracking a deep selloff in emerging markets driven by a resurgent dollar and the ongoing U.S.-China trade war. “The rupee is forecast to rebound and gain slightly to 66.87 in a year from about 67.45 on Tuesday. The poll of about 30 foreign exchange analysts was taken after the Reserve Bank of India hiked interest rates on June 6. The rupee was expected to get a boost from a weaker dollar outlook.
Even though a majority of economists polled by Reuters predicted two weeks ago that the Reserve Bank of India (RBI) would hike interest rates on Oct 5, the central bank surprised by keeping its policy unchanged and said it was not targeting any currency level.
After that decision, the rupee fell to a record low of 74.25 against the dollar. On Tuesday, the partially-convertible Indian currency hit a fresh low of 74.395 per dollar. Inflation in India was forecast to be a touch above the central bank’s comfort level of around 4 percent in the third quarter and the current one.
But India’s widening current account deficit, thanks to rising oil prices and a weak rupee, combined with below-normal rainfall this year could translate into rising price pressures over the near term.
“We believe the RBI is underestimating the inflationary pressure in the Indian economy and the impact of ongoing Fed tightening,” said Hugo Erken, senior economist at Rabobank, referring to a series of U.S. Federal Reserve rate rises expected in the coming year.
“Even as most (on the Monetary Policy Committee) voted to change the stance to ‘calibrated tightening,’ there was an evident lack of action on their part despite time running out to stop the rupee’s worst fall in last five years,” noted Prakash Sakpal, Asia economist at ING.
“We continue to look for the USDINR to head towards 75.0, factoring in our view of at least four rate hikes by the U.S. Federal Reserve over the year, which will be dollar and rates positive,” noted Radhika Rao, an economist at DBS Group Research.
The latest Reuters poll of over 50 currency strategists taken Oct. 5-9 showed the rupee was seen trading around the current rate, about 74 per dollar, in three months and strengthening just a bit to around 73 per dollar in a year.
The weakest forecast across was 78.0 while the strongest rupee outlook was 67.97 compared to 75.6 and 66.1, respectively, in the previous month poll.
But in a year, the rupee’s expected performance is broadly in line with expectations for most currencies as the dollar’s resurgence is predicted to fade. Rising inflation is a well-established risk and any further rapid rise in global crude prices would weigh heavily on the fiscal arithmetic, which is already widening.
In addition, the government is set to increase spending on populist measures ahead of the May general elections, which is likely to make foreign investors nervous.”The INR continues to be alluring with more robust growth and compelling FX reserve backstop,” said Vishnu Varathan, head of economics and strategy for Mizuho Bank in Singapore.
A majority, 27 of 48 analysts, said the risks were skewed more towards the rupee strengthening against the greenback over the next year. In a month the rupee is expected to trade at 62.50, 63.00 by end-June and 63.50 by end-March 2016. On Friday it was trading at 62.35 a dollar.