The rally in Indian rupee may halt soon and Asia’s best performing currency this year may even see a reversal of all gains through the next quarter on slowing portfolio inflows, potential downturn in equities markets and possible correction after the sharp surge, while expected hikes in the US interest rates will likely provide support to the US dollar, experts say.
A Reuters report, citing a poll, said on Wednesday (3rd May 2017) that the rupee is forecast to weaken to 66.23 per dollar in the year, falling by over 3% from its current trading level of 64.22. “The expected losses come despite the Reserve Bank of India having moved to a neutral stance earlier this year from an easing bias,” the Reuters report said. Although, the report added that economists have also suggested (in a separate poll) that the central bank will next likely cut interest rates towards the end of the year.
Rupee rallied 4.7% between January and March, its best first quarter in 42 years since 1975. It has further appreciated since then with overall about 6% rise in 2017 year-to-date, touching its 20-month high of 63.92 per dollar in late April.
However, the rupee’s surprise appreciation could end if global stocks, including India, run into a summer correction, DBS Bank said in a research report released today. “If equities correct in summer, INR could return all gains into 3Q (Jul-Sep) before recovering in 4Q, but closing the year below the high seen in 2Q (in April),” DBS Bank said in the report.
In the best case scenario, DBS Bank sees the rupee and the benchmark stock index BSE Sensex doubling gains in the year. However, in its worst case scenario, a hawkish US Fed policy would push the US bond yields higher, leading to a resurgent USD. it said.
Further, DBS report said that the rupee at present also carries the risk of correcting post the sharp rally. “For now, the risk of a summer correction in the INR cannot be discounted. Neither could we rule out a higher USD later in the year, especially if the Fed starts winding down its balance sheet as planned,” it said.