ING Bank NV has lowered its year-end rupee forecast just as the currency is staging a rebound. Rising oil prices and political uncertainty ahead of state elections will see Asia’s worst-performing currency resume losses, according to Prakash Sakpal, an economist at ING in Singapore, whose new estimate of 76.50 per dollar is the most bearish in a Bloomberg survey. The forecast signals a drop of more than 4% from current levels and compares with a survey median of 72.88.
The rupee is “is highly correlated with oil prices, which are definitely moving higher, and that’s going to make the current-account situation more difficult,” Sakpal said in an interview. “Investors will also start adding the political-risk premium to the currency.”
Prime Minister Narendra Modi’s government is gearing up for a big test, with elections in five states over the next two months before the national vote in 2019. Some opinion polls are already predicting a win for the main opposition Congress party in the key state of Rajasthan, and a close contest in Madhya Pradesh.
“It’s a big risk,” said Sakpal, who earlier estimated the rupee to end 2018 at 75 per dollar. A global emerging-market sell-off that’s triggered outflows from Indian bonds and stocks has dragged the rupee to new lows against the dollar in succession over the past few weeks – most recently 74.4825 on October 11. The currency is down about 13% in 2018, even as it Friday capped its first back-to-back weekly gain since August, rising 0.6% in the period. It gained another 0.1% to 73.2850 yesterday.
The reprieve has come as Modi’s government is said to consider tapping Indians living overseas to lure foreign-exchange flows to prop up the currency. The administration has raised basic customs duty on a number of items used in electronic, mobile communications in a move aimed at narrowing a current-account deficit. While the rupee’s rebound still looks nascent, Cinkciarzpl, one of its topforecasters in latest Bloomberg FX rankings, says the worst looks to be over for the currency.
“The rupee came under so much pressure as market participants didn’t predict the oil-price increase and the dollar’s appreciation,” said Marcin Lipka, a senior analyst at the brokerage in Poland. “The following months should be much calmer.” He predicts the rupee at 74 by December 31.
That said, what’s unnerved some analysts such as Sakpal is the Reserve Bank of India’s relatively muted response to the rupee’s tumble. The RBI kept interest rates unchanged earlier this month, pausing after back-to-back hikes since June, even as counterparts in Indonesia and the Philippines came out aggressively in support of their currencies.

Related Story