1. Rupee unlikely to extend surprise rally; may reverse gains by year-end

Rupee unlikely to extend surprise rally; may reverse gains by year-end

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.

By: | Published: May 4, 2017 8:30 AM
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. (Image: Reuters)

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 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.

Correction imminent

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.

Historic gains

The Singapore-based lender and financial services provider expects the rupee to fall to 64.7 per US dollar by the end of the second quarter of the current year, and further to 64.8 by third quarter and to 64.9 by the end of the year. The consensus Bloomberg forecast for the Indian currency is at 66 per US dollar by the end of June, and at 67 by the end of December.

“The likely slowing of portfolio inflows, continued intervention by the central bank amid higher real-effective exchange rates, and wider trade deficits given seasonal factors could slow the pace of further rupee appreciation,” a recent Bloomberg report said quoting Divya Devesh, Asia FX strategist at Standard Chartered. Devesh further said to Bloomberg that the rupee will likely see some consolidation in the near-term as its year-to-date gains are quite sharp on a historical basis.

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