Patel aftershock: How low will the rupee go?
The Indian rupee, which plunged on Tuesday after the country's central bank chief quit, is forecast to continue its tailspin to hit as much as 75 per dollar, or 20.45 per dirham, after a recent short-lived rally on the back of falling oil prices, analysts and currency experts said.
On Tuesday, the currency of the third largest Asian economy sank 1.5 per cent against the dollar to 72.46, or 19.74 per dirham, amid speculation that an RBI intervention kept it from falling further.
Indian stocks also witnessed a volatile trade, with the benchmark Sensex in Mumbai falling sharply at the opening bell before rebounding to sit slightly higher in the afternoon as results of the polls in 5 Indian states rendered a heavy blow to Prime Minister Narendra Modi's government. S&P BSE Sensex and NSE Nifty50, after shedding over 530 points and 150 points respectively, closed higher.
Analysts at Fitch Ratings said they expect the Indian currency to weaken to 75 against the greenback by the end of next year on a widening current account deficit and tighter global financing conditions.
On October 10, the rupee plummeted to a record low of 74.4 against the dollar or 20.25 against the dirham.
Despite a few recent advances, the rupee is on track for its worst yearly performance in 5 years in 2018 and a survey had forecast it to weaken further as uncertainty builds, heading into national elections due by May.
The credit ratings agency also revised India's growth forecast for the current financial year to 7.2 per cent from the earlier 7.8 per cent.
Lukman Otunuga, research analyst at FXTM, said the departure of Patel from the RBI has not only heightened investor uncertainty over India, but more worryingly, will probably encourage the return of speculation of potential political influence over central bank policy in India.
"With Patel's sudden exit eroding investor confidence as India prepares for a general election next year, I would expect the rupee to continue its tumble on this shocking development for a while yet," said Otunuga.
Analysts say Patel's departure, extremely rare for a central banker before the end of his term, is evidence that the RBI's autonomy is under threat.
Singapore's DBS Bank predicted that the rupee would slide to as weak as 75 per dollar. UBS Securities India also cut its year-end forecast to 73 from 66, while Scotiabank saw the rupee nearing 74 in the run up to the Federal Reserve meeting.
Prospects for high crude oil price following Opec plus deal on output cut remain key among the factors behind the impending fall of the rupee.
Since India imports 81 per cent of its crude oil needs and is the third-largest importer of oil after US and China, a higher crude rate leads to more amount of rupee being converted to dollar as the payment is done in dollars.
Pradeep Unni, head of Strategic Business Development at Richcomm Global Services DMCC, said continued uncertainty in trade wars and fear of new tariff being imposed by the US, along with recent changes in the political front in the Indian sub-continent are likely to keep the rupee under heavy pressure.
"Market expects the present ruling government to loose key states and even loose majority in the next general elections due in May 2019. But the bigger fear is the possibility of a hung parliament as the opposition is also not strong enough to have a comfortable win. This may jeopardise the recent economic stability and progress made over the last five years. If enough counter measures are not taken well in advance to decrease the current deficit, the rupee's fall to 75 to the dollar cannot be declined," said Unni.
He said due to the tight liquidity conditions in global markets, there is an immediate necessity of an able governor at the helm of the RBI to protect the currency from any volatile movements.
A burgeoning current account deficit (CAD) is another worrying factor for the rupee. CAD widened to $19.1 billion in the July-September 2018 quarter against $6.9 billion in the year-ago quarter, primarily on account of a higher trade deficit.
Current account deficit (CAD) arises when a country's total imports of goods, services and transfers is greater than exports.
A widening CAD usually weakens the domestic currency. As a percentage of GDP, CAD in the reporting quarter (Q2 FY2019) rose to 2.9 per cent against 1.1 per cent in the year-ago quarter, analysts said.
Bank of America Merrill Lynch has widened its CAD estimate by 0.20 per cent to 2.8 per cent of GDP for fiscal year 2018-19 citing high crude oil prices, which the brokerage said could reach up to $95 by June 2019.
Another threat to rupee stability is large-scale pullout of funds by overseas investors. In September alone, $3 billion had been withdrawn from the capital markets.
A stronger dollar is not good news for the Indian currency, which is down more than 11 per cent since the beginning of this year. This might accelerate its fall to the 75 level in the near future, analysts said.
The US Federal Reserve raised a key interest rate for the third time this year, further spurring foreign fund outflows from the Indian market as rate hike lowers investment returns for foreign investors prompting them to sell.
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