The Indian rupee, one of the worst-performing Asian currencies last year, will fall further in the coming months and is expected to drift back to trade around where it is now in 12 months, according to a Reuters poll of FX strategists.
After falling more than 10% in 2022 the rupee has traded within a 80.88-82.95 per dollar range this year and was just above 82.10 on Tuesday. It was expected to stay in that range over the forecast horizon.
Median forecasts from 40 respondents to a March 31-April 4 Reuters poll showed the rupee trading at 82.40/dollar by the end of the month and 82.55/dollar by the end of June. It is forecast to drift up to 81.50/dollar in 12 months’ time.
However, a fifth of respondents forecast the currency will change hands at 82.90/dollar or weaker as early as next month.
A strong majority of poll respondents who answered an additional question, 13 of 16, said risks to their forecast were skewed towards the rupee being even weaker over the next month.
The U.S. Federal Reserve‘s indication it is near the end of an historically aggressive tightening cycle provided some relief to most currencies last month, with the rupee up 0.6%. But the poll expects the currency to come under pressure again.
“The Fed might raise rates once again in May, which is keeping the dollar… supported,” said Sakshi Gupta, principal India economist at HDFC Bank.
While the Reserve Bank of India (RBI) has raised its repo rate far less than the Fed during this cycle, it also has less scope to lower borrowing costs over the forecast period, Gupta said.
“So the yield differential and yield-seeking behavior might attract some flows into India,” she said, referring to later in the forecast period.
The partially-convertible rupee, which has depreciated in nine of the past 10 years, hit an historic low of 83.26 last October, forcing the RBI to intervene.
Despite burning through billions of dollars of foreign exchange reserves last year to combat the dollar’s strength, at $578.78 billion the RBI has enough firepower to carry on with its interventions to prevent excess volatility.
That is another reason the currency is likely to stick to ranges.
“A key driver of the Indian rupee will continue to be the RBI’s FX intervention strategy,” noted Lin Li, head of global markets research Asia at MUFG. “In our view, the RBI seems to dislike excessive FX volatility, especially if it is driven by portfolio flows (in both directions).”
