The Overvalued Rupee Could Tumble To Rs 68-70 By March 2018
The Indian currency turned around from a position of strength to weakness as news that the government was considering a fiscal stimulus was not well received in the forex market.
The rupee, which had strengthened to about 64.15 and higher against the US dollar in July and August 2017, lost significantly in the last two weeks of September and dived to Rs 64.80, losing 65 paise. A string of global and domestic macro-economic challenges will further pile pressure on the rupee in coming months.
Experts reckon that the rupee could dip significantly in the months ahead. Domestic macro-economic challenges such as swelling inflation and the rising current-account deficit could further add to pressure on the rupee, which could drive the currency as low as 68-70 to the dollar.
In a research note to clients, Dhananjay Sinha of Emkay Global said that the “relapsing of India’s twin deficit scenarios amid slow growth and a revival in inflationary pressures, coupled with tapering global liquidity would trigger depreciation in the overvalued Indian rupee.”
In fact, the triggers for a further weakening of the rupee are evident on many fronts. The government speed-charging the economy with a fiscal stimulus is expected to bump up the fiscal deficit, which was targeted at 3.2 percent for FY18.
Further, this stimulus will swell the current account deficit, which is expected to balloon in the coming year.
“As a collateral fallout, the Indian current-account deficit (CAD) is expected to widen from 0.7 percent in FY17 to 1.8 percent in FY18,” according to Emkay Global.
The US Fed indicated that it would shrink its balance sheet and withdraw the additional stimulus. This would suck out liquidity in the global market, and drive the US dollar higher.
Besides, volatility has returned to global foreign-exchange markets. Also, S&P downgraded China’s credit rating one step down from AA- to A+ (read double A minus to A plus) due to its debt situation which poses an “economic and financial risks.”
As a result of all this, the rupee could be hit in the coming year. Emkay Global projects that it could touch the Rs 68-70 mark by March 2018. “We maintain our INR/USD target of Rs 68-70 by end FY-18 and expect the 10-year G-Sec yield to harden to over 7 percent.”
The 10-year G-Sec, which had dipped to 6.4 percent in July-August this year, is now once again hovering around the 6.6 level.
India’s foreign-exchange reserves are a saving grace, though - holding at $400 billion - since it helps cover the import bill of nearly 11 months.
