The Indian rupee remained in a narrow range on Monday as positive cues from improving global risk appetite dampened as strong interbank dollar auctions.
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In addition to the lack of progress on the US-India trade agreement, the continued outflow of foreign capital is weighing on the economy. Rupees It has been Asia’s worst-performing currency this year.
Nomura and S&P Global Market Intelligence predict that the rupee in the world’s fifth-largest economy could fall to as low as $92 against the dollar by the end of March, with any appreciation in the rupee largely dependent on a trade deal with the United States.
“We believe the rupee is currently undervalued and expect a correction once there is more clarity on the US-India trade deal,” said Hanna Ruchnikava-Shorsch, head of Asia-Pacific economics at S&P Global Market Intelligence.
S&P Global expects a trade deal to be reached within the next six months.
As trade talks between New Delhi and Washington drag on, India faces one of the highest tariffs in the world at 50%, dwarfing even the tariffs on China.
After steep tariffs went into effect in August, India’s exports to the US fell by nearly 12% in September and 8.5% in October, but rebounded sharply in November with a 22.6% increase.
Sonal Varma, chief economist for India and Asia ex-Japan at Nomura, said the main economic risk is that India could lose momentum in its supply chain shift, primarily from companies serving the U.S. market, due to continued high tariffs.
“Prolonged uncertainty has led to outflows from overseas portfolios, and a weaker rupee could impact import costs and inflation,” he added.
However, a weaker rupee could make exports more competitive, and lower domestic price increases could help absorb the impact of import inflation caused by a weaker currency.
From $85.64 at the beginning of the year, the Indian currency breached $90 against the dollar at the beginning of the month, which was an important psychological trigger. It took less than 15 trading sessions for the currency to cross 91 rupees to the dollar.
bearish foreign investors
Global investors have been bearish on India for much of this year, with net outflows of more than $10 billion across investment classes so far this year, according to data from custodian NSDL.
Somnath Mukherjee, chief information officer and senior managing partner at ASK Private Wealth, told CNBC’s “Inside India” that the main reason for the rupee’s depreciation is not India’s current account deficit, which is expected to be at a manageable level of 1% to 1.5%.
He added that the rupee will remain under pressure until outflows of foreign portfolio investors reverse.
Capital outflows to Indian stocks have been particularly strong, with overseas portfolio investors having been net sellers since the beginning of the year, having withdrawn nearly $18 billion as of December 19.
“The weaker rupee is a double-edged sword for FIIs,” Ruchnikava-Shorsch said.
He said this could be a “good entry point for Indian equities”, but investors would assess the negative impact on “prolonged rupee weakness and trade policy uncertainty”, government finances and the overall growth outlook.
India’s central bank reaffirmed its policy of letting market forces determine the exchange rate at its monetary policy meeting earlier this month, but on Wednesday it reportedly intervened “aggressively” to curb the currency’s decline.
