India rupee seen to drop past 66 per dollar as Fed hikes

India’s rupee, the worst-performing currency in Asia last month, is likely to weaken further as higher US interest rates boost the dollar, according to Mizuho Bank.
“Some rupee slippage looks unavoidable in the coming months as dollar bulls take charge,” said Singapore-based Vishnu Varathan, head of economics and strategy at Mizuho, the third most-accurate rupee forecaster in Bloomberg’s quarterly rankings. While his year-end rupee forecast is 65.8 per dollar, the currency could potentially drop past 66 during the quarter before finding an initial support at 67, he said.
The Bloomberg Dollar Spot Index in September rallied the most this year as the Federal Reserve said a rate increase in December was on the table and President Donald Trump announced a plan to cut taxes. The greenback’s recovery is making investors review the outlook for emerging-market assets.
The rupee has gone from being one of Asia’s best-performing exchange rates in the first half to among the worst, with foreigners dumping local stocks amid an economic slowdown and weak corporate earnings. Concern that any potential fiscal stimulus from Prime Minister Narendra Modi’s government before the 2019 elections will worsen India’s public finances saw the rupee sink to a six-month low on September 28.
“The road to 2019 elections is paved with populist potholes that could dim fiscal efforts,” said Varathan. “The upshot is that as trends in the fiscal and current-account deficits turn less favourable, India’s policy makers are confronted with sharply diminished margin of error.”
While these concerns take some shine off the rupee, the currency still retains its “real yield allure” and remains relatively attractive when compared with other sovereigns of similar credit-risk profile, Varathan said. The rupee was at 65.2425 per dollar yesterday. It is up 4.1% this year, set for its first annual gain since 2010.
Varathan in March predicted the potential for the year climb, a view that contrasted a bearish rupee consensus at the time. Now, his year-end forecast is more pessimistic than the median estimate of strategists surveyed by Bloomberg, which shows the currency will recover to 64.50 per dollar by end-2017.
“Near-term back-stops suggest that the rupee may face cyclical, and manageable, headwinds rather than a fundamental crisis of confidence,” he said.
Some of the rupee’s other forecasters appear to be more positive on the currency even in the immediate future. Here are their comments:
Emirates NBD (Aditya Pugalia, director – financial markets research in Dubai): Expects INR to stay range-bound in 4Q; does see some weakness due to changing tone in monetary policy of developed markets. India stands out as a fundamentally strong story among EMs, with political stability, strong macroeconomic position, low inflation, stable currency and still-high growth trajectory.
Significant part of growth slippage can be attributed to transient factors like roll-out of the goods and services tax; GDP as evidenced by high-frequency data should start rebounding over the next two quarters.
Government has not fallen prey yet to demands of fiscal stimulus and seems committed to maintaining the fiscal prudence it has displayed over the last three years. USD/INR forecasts: 65 for end-2017, 66 for end-March 2018.
Yes Bank (Shubhada Rao, Mumbai-based chief economist): Slower growth, widening current-account deficit and higher inflation were already factored into USD/INR forecasts, by way of an upward trajectory. However, do see points of risks such as deterioration in India’s fiscal situation and/or delayed post-GST economic recovery, which could pose some upside pressure on the pair. Despite the depreciation, risk-adjusted carry return for INR is amongst the most attractive amongst EMs. USD/INR forecasts: 65 for end-December and 64.5 for end-March.
Westpac (Frances Cheung, Singapore-based head of macro strategy): Expects INR outperforming Asian peers; view is primarily based on India’s strong economic growth relative to the region. USD/INR forecasts: 64 at end-2017 and 63 at end-March.