Rupee may fall to 76 against US dollar by year-end: HSBC

By: | Updated: October 17, 2018 2:40 AM

The rupee could be significantly weaker than thought earlier at the ends of the current and next calendar years, HSBC Global Research said, even as it saw the Reserve Bank of India becoming ‘more accommodative’ of the currency’s weakness.

Rupee may fall to 76 against US dollar by year-end: HSBC

The rupee could be significantly weaker than thought earlier at the ends of the current and next calendar years, HSBC Global Research said, even as it saw the Reserve Bank of India becoming ‘more accommodative’ of the currency’s weakness.

According to the firm, the steps taken by the government recently to support the rupee may not suffice to support it. Also, the option of financing the current account deficit (CAD) with more external debt could not only be sub-optimal but also rather difficult.

HSBC Global Research has revised its forecasts for the rupee’s exchange rate against the dollar to 76 for end-2018 from 73 predicted earlier and 79 (74) for end-2019, citing “multiple headwinds” being faced by the local currency, of which a widening CAD and portfolio outflows “are going to get more disadvantageous” for it in the coming quarters.

Among the negatives, it listed a less price-elastic demand for oil (as the government is trying to limit the pass-through of high prices to consumers) and likely decline in FDI inflows ahead of elections.

The rupee climbed 35 paise to end at a nearly two-week high of 73.48 per dollar on Tuesday.

The Indian currency, which has fby over 14% in the last one year, saw sharper depreciation relative to some emerging market peers. However, the current value of rupee against the dollar is still within the 67-79 fair value zone of HSBC (despite the plunge, the rupee’s real effective exchange rate against a basket of 36 currencies is still 6.5% higher than the incumbent NDA government assumed office in May 2014.)

Given insufficient net FDI flows and portfolio outflows, India will now have to fund its CAD with more ‘other investment’ (read external debt), HSBC noted, but cautioned that it could be a ‘sub-optimal option’ as Corporate India would have to bear the cost of the falling rupee as it borrows from abroad. It hinted that despite the recent easing of restrictions, foreign investors’ demand for rupee-denominated corporate bonds might remain soft.

The research firm also noted the RBI becoming “more accommodative” of the rupee’s weakness (float forex reserves through September, no rate hike in October review of monetary policy). “…there have been $13 billion of portfolio outflows by global investors in FY2019 (the RBI’s balance of payments data had said net portfolio inflows in Q1 was $8.1 billion), split roughly evenly been bonds and equities. The rupee’s yield advantage versus the US dollar is probably seen as relatively low… In this context, the RBI’s unexpected decision to keep rates unchanged on October 5 does not help. Even if the RBI hikes rates by a total of 50 bp in December and Q12019… this would only match the rate hikes projected by (the US Fed),” it observed.

According to HSBC, the RBI might even be reluctant to sell dollars from its reserves as it wants to maintain a ‘very high level of reserves adequacy,’ but reckoned that the central bank could spend about $50 billion more before forex reserves dip into the IMF’s assessing reserves adequacy (ARA) range.

India’s CAD stood at $15.8 billion, or 2.4% of the gross domestic product (GDP), in the April-June period of this fiscal, nearly the same level (2.5% of GDP) as in the year-ago quarter. However, strong portfolio outflows, especially of the debt variety, and robust repayment of long-term buyer-supplier credit, resulted in depletion of the country’s forex reserves to the tune of $11.34 billion in Q1FY19, while the year-ago quarter had seen accretion of a similar amount to the reserves.

While the IMF revised upwards its India CAD forecast for FY19 to 3% of GDP, HSBC Global Research predicted the deficit to be 2.8% of GDP for the whole of FY19, but added that the risk is for higher deficit, since the underlying assumption that Brent crude would stay at $73 a barrel for the next six months was a ‘tall order’.

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