A global emerging-market sell-off that’s triggered outflows from Indian bonds and stocks has dragged the rupee to new lows this year. Photo: Bloomberg
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 estimate of 76.50 per dollar is the most bearish in a Bloomberg survey. The forecast signals a drop of more than 4% over the rupee’s close Friday 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 11 October. 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.
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.
Even so, 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.
The inflation-targeting central bank has for long maintained that it intervenes in the currency market only to curb undue volatility, and doesn’t target any level for the exchange rate.
“I don’t see any proactive element in the RBI policy,” said Sakpal. “You indeed are focusing on inflation and nothing else. I wish the policy was more broad-based.”
The RBI this month switched its monetary policy stance to “calibrated tightening” from neutral, citing potential risks to inflation from surging oil. The rupee’s weakness is also a reflection of India’s vulnerability to higher Brent prices as the nation imports about 80% of its oil needs.
A higher import bill would translate into the shortfall widening to 2.5% of gross domestic product in the fiscal year to March 2019, Sakpal said. That would be the highest since fiscal 2013, and compares with 1.9% in fiscal 2018.
“A confluence of factors—widening current-account deficit on the back of oil prices, risk of higher fiscal deficit, inflation and investors asking for political premium ahead of state elections—suggests that there is more downside,” Sakpal said.