MUMBAI: The rupee may weaken beyond Rs 70 to the US dollar by the end of the year, but outperform other emerging market currencies as India remains the best stable macroeconomic story, an ET poll shows.
Deutsche Bank, DBS Bank, Bank of America, Yes BankBSE 0.02 %, IFA Global and Edelweiss Financial ServicesBSE -0.61 % are among those predicting the local currency to hit the 70-mark or fall beyond it. Just two of the 18 market participants polled expect the rupee to firm up from the current level (67.32 a dollar).
“The rupee is expected to weaken, driven by a strong dollar,” said Indranil Sengupta, co-head of India research at Bank of America Merrill Lynch. “But, the local unit should still outperform most of the emerging market currencies as long as oil stays low, helping India to gain on the current account front.”
A current account deficit or surplus is the gap between the values of imports and exports. It was in a deficit of $300 million, or 0.1% of gross domestic product, in the April-June quarter last year, narrowing from 1.2% a year earlier, according to the latest available data.
Crude oil prices have been hovering between $50 and $60 per barrel in the past few months. Though the prices are marginally higher than last year’s, they are still less than half from the peak eight-nine years ago and at a comfortable level for India, a net oil importer. India pays in dollars for crude and any rise in oil prices would increase the requirement for the greenback, in turn weakening the rupee.
Overseas debt investors in India are ex pected to earn about 4% in total returns after adjusting for expected spot exchange rate, compared with China’s 1.21% and Brazil’s 0.53% in the fourth quarter of 2017, a Bloomberg forecast showed at the close of Friday’s local market hours.
That means, Indian assets show relatively higher return potential at a time when investors are likely to exit emerging markets amid expectation of US rate hikes and the resultant strength to the dollar. In February, the dollar has already gained nearly half a percent against a basket of six major currencies it is compared with.
“As rate differentials narrow (India vs the US), the USD will strengthen across the board; we doubt if the rupee would resist the trend,“ said Kaushik Das, a Mumbai-based economist at Deutsche Bank.
“It is unlikely that the RBI will tolerate a persistent appreciation of the real exchange rate in the months ahead, as it leads to a loss of export competitiveness, which could hurt growth.“
But, a positive Budget, which suggests future g rowth through infra and rural spending, could cap the rupee’s value erosion.
“Although the rupee is expected to depreciate over the year, Budget proposals will help moderate the pace of depreciation,“ said Saugata Bhattacharya, chief economist at Axis BankBSE 1.30 %.
“The Budget will help revive growth, which is likely to attract overseas equity funds. This will counter debt fund outflows, triggered by US rate hikes leading to investor exodus from emerging markets.“
In 2017, foreign portfolio investors have net sold Rs 1,152 crore worth of equity and debt investments, compared with Rs 8,814 crore in January last year.
The rupee gained about 13.5% to the dollar since the end of 2013 in real effective exchange terms, a rate that the RBI arrives at by comparing the local unit against a basket of 36 currencies after adjusting for inflation in those countries, Deutsche Bank said in a note a few weeks ago, while predicting a dip in the local unit’s value in the coming months.
But, the government, in its Economic Survey report, has differed on this measure, citing higher index weight to the euro.