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Home  » Business » These factors will decide rupee's fall against the dollar

These factors will decide rupee's fall against the dollar

Last updated on: June 05, 2015 17:53 IST
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The rupee will weaken to its lowest in several years over the next 12 months as the economy struggles to pick up momentum and on expectations that an impending rise in U.S. interest rates will keep the dollar on a steadily strengthening path.

The rupee has largely held its ground against a surging dollar so far, falling just 1.5 per cent since the start of the year even as the Reserve Bank of India cut interest rates three times in an effort to shore up the economy, most recently on Tuesday.

The poll of about 30 foreign exchange analysts this week showed the rupee will trade at 64.00 per dollar by end- June, 64.50 in six months and weaken to 65.00 in a year.

It was trading around 63.93 against the dollar on Friday.

That 12-month forecast is the lowest in many years of Reuters polls and, if realised, would mark the weakest exchange rate for the rupee since September 2013, when the Fed announced it would begin tapering its massive stimulus programme.

"The rupee is not that attractive any longer," said Sacha Tihanyi, currency strategist at Scotiabank.

"Relatively high yields (in India) compared to developed economies could insulate the currency somewhat, but I think portfolio outflows due to a Fed hike in September will make it one of the least attractive emerging market currencies."

Indeed, a Reuters poll last week showed bearish bets on the rupee rose to its highest in nearly two years recently, the most among emerging Asian currencies.

And a majority of currency strategists polled separately this week said the dollar was just pausing, after data showed the U.S. economy contracted in the first quarter, and will resume its rally soon.

Both those situations point to a dim outlook for the rupee and the economy on the whole, especially at a time when weak industrial activity and the risk of delayed monsoon rains threaten to puncture the recovery.

India's economy grew 7.5 per cent year-on-year in the January-March quarter, although many - including RBI Governor Raghuram Rajan - are sceptical about the revamped data series.

Economists surveyed in a Reuters poll published on Friday expect the central bank to wait and see how the monsoon season affects food prices.

They predict the next rate cut in the fourth quarter.

 "We envision further downside risks for the rupee ahead, especially if the Fed begins to normalise policy in September, as we assume...and as the RBI continues on its easing bias, which is to the rupee's disadvantage," analysts at BTMU wrote in a research note.

The poll also showed the Chinese yuan would remain mostly range-bound over the coming year as the central bank is likely to keep the currency relatively stable despite the slowing economy, and partly ahead of the possible inclusion of the yuan in the International Monetary Fund's currency basket - the so-called Special Drawing Rights (SDRs).

Analysts predict the yuan will trade around 6.20 to the dollar in a month, 6.20 in three months and 6.17 in a year from Friday's trading value of around 6.21.

Those expectations are largely unchanged from last month's poll.

Photograph: Reuters

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Source: REUTERS
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