MUMBAI: The rupee may slump to 73 to a dollar by December if emerging market (EM) currencies collectively head south in their response to the steady and unidirectional gains for the US unit, pointing to a period of sustained volatility in the foreign-exchange market.
An exclusive ET survey, which polled 20 market participants, showed that more than half the respondents expect 73 to be the lower limit for the local unit this calendar year. One of the participants believes the rupee could slide to 74 to a dollar.
“If the situation in emerging markets continues to deteriorate in the face of a strengthening dollar, the contagion will spread, weighing on the rupee as well,” said Ashish Vaidya, head of markets for India at Singapore’s DBS Bank. “As long as oil keeps rising, the local unit will remain under pressure.”
To be sure, India’s domestic-focused economy has continued to outperform peers, with gross domestic product (GDP) expanding at 8.2 per cent in the June quarter – the fastest pace in a couple of years. Still, currency-market volatility and rising global interest in safe-haven assets could outweigh broader growth in the short run.
“With a risk-off sentiment in Emerging Markets, positive growth figures may not” immediately get the treatment they deserve, Vaidya said.
Separately, crude oil price climbed nearly 10 per cent in the past fortnight amid tighter global inventories that are tied to US sanctions on Iran. India is one of the major oil importing countries, meeting three-fourths of its requirement through overseas shipments.
“Emerging market weaknesses and elevated oil prices are now dictating the rupee’s rout,” said Piyush Wadhwa, head of trading at IDFC Bank. “The rupee would move with a slightly depreciating bias as countries with wider current account deficit are hit the most.”
“Currency traders should brace for increased volatility as market conditions could change frequently with evolving global developments,” he said.
Currency crashes in Argentina and Turkey have triggered concerns of a global contagion, with renewed worries over the USChina trade war. The Argentine peso and Turkish lira have slumped 52 per cent and 42 per cent, respectively, against the dollar this year.
Indonesia’s rupiah hit its lowest level in two decades, signaling that currency collapses are clouding the economic prospects of countries with higher trade deficits, or excess of overseas spending over revenue.
A rise in import bill worsens the country’s fiscal condition, prompting the government to borrow more. This, in turn, punctures global investor confidence as higher borrowing runs contrary to expected fiscal rectitude.
India’s current account deficit is expected to widen to 2.8 per cent of the GDP this financial year, up from 1.9 per cent last year, according to a Nomura Research report.
Investments in stressed assets could negate some of the negative impact on the currency.
“Overseas investors could invest in stressed assets,” said Ashutosh Khajuria, executive director and CFO of Federal Bank.
India’s proposed asset management companies to run bad assets could attract billions of dollars in overseas cash, show some market estimates.
Source: economictimes.indiatimes.com