Ru­pee to re­bound but path rife with pit­falls: Poll

Financial Chronicle - - MONEY - VIVEK MISHRA

THE ru­pee will erase some of this year’s losses against the dollar over the com­ing 12 months but high volatil­ity in the run up to gen­eral elec­tions in 2019 could send it off-piste, a Reuters poll found.

A sell­off in emerg­ing mar­kets and a widen­ing fis­cal deficit, ex­ac­er­bated by ris­ing oil prices— In­dia’s big­gest im­port bill—has hurt the ru­pee this year.

The cur­rency hit an 18month low of 68.47 per dollar in May and is down over 5 per cent so far this year, mak­ing it one of the worst per­form­ers in Asia.

But the ru­pee is fore­cast to re­bound and gain slightly to 66.87 in a year from about 67.45 on Tues­day, ac­cord­ing to the poll of about 30 for­eign ex­change an­a­lysts taken af­ter the Re­serve Bank of In­dia hiked in­ter­est rates on June 6.

That me­dian, al­though slightly weaker than in May, was driven by ex­pec­ta­tions for Asia’s third largest econ­omy to re­main the fastest growing ma­jor econ­omy as it did in the first three months of 2018 and on pre­dic­tions for fur­ther in­ter­est rate hikes from the RBI.

“The ru­pee 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.

“So once elec­tion risks fade and oil price as­cen­dancy is sub­dued by sup­ply-de­mand gaps iron­ing out - mostly via higher US and OPEC sup­ply—we ex­pect the ru­pee will re­gain some trac­tion as some of the risk pre­mium—which pres­sures the cur­rency now - erodes.”

The ru­pee was also ex­pected to get a boost from a weaker dollar out­look.

“We ex­pect the dollar to start weak­en­ing around the end of this year or the start of next year. Weaker dollar is ex­pected to sup­port most emerg­ing mar­ket cur­ren­cies,” said Amy Yuan Zhuang, chief Asia an­a­lyst at Nordea.

But not every­one was con­vinced, with the year­a­head fore­casts in the widest range in Reuters polls since July 2016, sug­gest­ing the ru­pee’s level in the run up to the gen­eral elec­tions next year is far from clear.

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 al- ready 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.

Over a quar­ter of nearly 30 re­spon­dents in the lat­est poll, who gave a fore­cast for the cur­rency in a year, ex­pect the ru­pee to weaken to be­low the his­toric low of 68.8985 per dollar.

“In­dian ru­pee will de­pre­ci­ate par­tic­u­larly due to po­lit­i­cal uncer­tain­ties built-up be­fore the gen­eral elec­tions next year,” ac­cord­ing to Nir­mal Bang’s econ­o­mist, Teresa John, who fore­casts the cur­rency to weaken to 70 in a year.

“Any­thing be­yond the 70 mark should re­ally be a cause for alarm, and if the cur­rency falls be­low 69.5, there will be heavy RBI in­ter­ven­tion,” John added.

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