India’s rupee will recoup only some of its recent losses against the dollar over the coming year as the interest rate gap is set to widen further alongside a worsening current account deficit, according to a Reuters poll of FX strategists.
The currency has declined in every month this year – its longest losing streak in almost four decades – as the US Federal Reserve has adopted far more aggressive policy tightening than its peers, including the Reserve Bank of India, boosting the greenback to two-decade highs.
With more hikes to come from the Fed, including a likely fourth straight 75-basis point hike later on Wednesday, and the RBI expected to be more tame, the policy divergence will probably expand further. That means no respite for the sinking rupee at least in the near term.
Down over 10 per cent against the dollar this year despite the RBI burning through its dollar reserves to support the currency, the rupee will trade at 82.5 per dollar in three months, near where it was on Tuesday, according to the Oct. 28-Nov. 1 Reuters poll of 26 FX analysts.
The rupee touched a lifetime low of 83.29/$ on Oct. 20, but the median view of 13 analysts who answered a separate question showed it would surpass that to trade as weak as 83.50/$ before year-end. Forecasts ranged between 83.00-84.20/$.
“The Fed’s communication on Wednesday is likely to set the course for the dollar and consequently the rupee over the coming weeks,” said Sakshi Gupta, principal economist at HDFC Bank.
“Continued hawkish commentary could add pressure on the rupee,” she added.
That means the RBI, which has hiked its repo rate by 190 basis points this year and is expected to add only 50 basis points more in the current tightening cycle, will likely draw down its currency reserves further.
Those reserves, already depleted by around $118 billion from a peak of $642 billion over a year ago, were forecast to fall to $510 billion by the end of this year, according to a separate Reuters survey.
Already-elevated oil prices – a key factor behind India’s worsening current account deficit – are unlikely to ease anytime soon, putting further pressure on the currency.
The current account gap was expected to end the fiscal year at its widest in a decade.
Against that backdrop, the rupee was expected to gain only 1.5 per cent over the coming year to 81.5/$, coming nowhere close to reversing this year’s double-digit loss.
Over one-third of strategists expected the currency to hit an all-time low at some point over the next 12 months.
“USD/INR could push towards 85 on account of further USD strength and need for effective exchange rates to come off to reflect the wider funding gap,” noted Samiran Chakraborty, chief economist for India at Citi.
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