The rupee may slump to a new low this year amid global policy uncertainties while domestic interest rates will remain elevated, raising borrowing costs, according to an ET poll of 20 market participants.
Nearly three-fourths of the respondents believe the local unit could touch 69 to the dollar with some even pointing to 70 by December-end. The rupee is one of the worst-performing emerging market currencies this year, having lost about 6.7 per cent to the greenback to close at 68.13 on Monday.
Indian corporates may borrow less ahead of elections with the likely benchmark rate at 8 per cent or more. Half the poll participants were of the opinion that the benchmark yield will either hover around that level or rise further. “We are in the first leg of dollar bull market,” said Ashish Vaidya, head of markets for India at Singapore’s DBS Bank. “More dollar strength is yet to come given the trade policies introduced by US government. External factors coupled with domestic macro measures like weak current account deficit or fiscal deficit are likely to impact the rupee. The US Fed seems to be on course to raise rates.”
Global Trade War
A global trade war looms with the Trump administration threatening tariffs on goods from China, Europe and other countries including India, all of which have said they will retaliate.
“This along with inflation dynamics will lead to higher rates in the longer ends,” said Vaidya.
The rupee weakened to a record of 68.86 on November 24, 2016, sliding past 68.85, which it touched on August 28, 2013.
“India is unlikely to remain immune to emerging market risks where we see extended foreign fund outflows,” said Sakshi Gupta, economist at HDFC Bank. “Globally, investors are seeking safe heaven assets with an improving US economy. Still, India’s fundamentals are perceived to be better than other markets, which may act as a cushion against a bout of fund outflows.”
India has stayed in revival mode, expanding 7.7 per cent in the March quarter, firming up its status as the world’s fastestgrowing major economy.
Foreign portfolio investors have sold domestic securities worth a net Rs 45,631 crore this year compared with a net investment of Rs 1.48 lakh crore between January and June last year, according to National Securities Depository Ltd data.
The rupee could fall 1.25-1.5 per cent from current levels in the rest of the year, according to poll respondents. Against this, benchmark bond yields too are likely to remain high.
“The desired depreciation in the rupee against the dollar should not be less than the inflation differential between US and India,” said Ashutosh Khajuria, executive director, Federal Bank.
Retail inflation rose to a fourmonth high of 4.87 per cent in May as fruits, vegetables and cereals became dearer as did fuel. In May last year, retail inflation was as low as 2.18 per cent.
Rising oil prices pose an inflation risk as the country meets its crude consumption mostly through overseas shipments.
“The consolidated fiscal deficit is high, which has kept interest rates elevated,” said A Prasanna, chief economist at ICICI Securities Primary Dealership. “Over the last 12-18 months, the current account deficit (or excess of overseas spending over revenues) has widened rapidly with both oil and non-oil components increasing.”
The combined central and state deficits amounted to 6.2 per cent at the end of March, according to ICICI Securities Primary Dealership.
Bank rates have not gone up in line with sovereign bond yields while some banks have started looking for credit growth opportunities. This limits corporate interest in raising money via bond sales, which are also hamstrung by operational difficulties.
On the political front, the country will be going in for state and general elections over the next four quarters. This has given rise to speculation about possible largesse that would unsettle fiscal discipline.
“Upcoming elections trigger a bit of policy uncertainty,” said Abhishek Goenka, CEO of Mumbai-based advisory IFA Global. “A cocktail of factors including dollar strengthening, foreign fund outflows, general emerging market weakness and oil would continue to weigh on the rupee.”