Slowing Indian economy spells tough times ahead for rupee

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BENGALURU: A slowing domestic economy will prevent India’s rupee from recouping this year’s losses against the dollar in 2020, with optimism around an easing in the US-China trade dispute not enough to give it a further boost, a Reuters poll showed.

After falling nearly 9pc in 2018, the Indian currency has shed another 4pc this year to touch a 2019 trough of 72.40 per dollar on Sept 3. It has since popped up over 2pc, along with other emerging market currencies, on hopes of a possible trade deal between the world’s two largest economies.

But nothing has been agreed yet, let alone a meeting scheduled.

A barrage of rate cuts from the Reserve Bank of India this year – five reductions in succession for a total of 135 basis points off the repo rate, now at 5.15pc – has done nothing concrete so far to revive a slowing Indian economy.

Neither have several government fiscal stimulus measures introduced this year, which have become a negative for the rupee’s outlook given it will be difficult for Prime Minister Narendra Modi’s government to meet its fiscal deficit targets.

“We expect the INR to weaken as risks of sluggish growth and fiscal slippage intensify,” said Rini Sen, India economist at ANZ.

“Stable portfolio flows led by equities and global cues like trade negotiations, on top of rate cuts, have led to bouts of optimism. However, we think the currency market is under-pricing downside risks to domestic growth.”

The Nov. 1-6 Reuters poll of over 40 strategists predicted the rupee INR= to weaken about 1.3pc to 71.90 against the greenback in 12 months from around 71.00 on Wednesday.

The RBI, the most aggressive major central bank in the world this year for easing, is expected to cut the repo rate at its sixth meeting in a row in December, a Reuters poll showed last month, which could put further pressure on the currency.

“Unlike the previous cuts, additional cuts could erode the allure of the rupee as a higher yielder, while (the) growth prospect remains a concern,” said Saktiandi Supaat, head of foreign exchange research at Maybank based in Singapore.

Indian economic growth has steadily slowed to a six-year low of 5.0pc in the April-June quarter from an 8.1pc peak in the January-March quarter of 2018 and recent business surveys indicate it will slow further.

While the year-ahead consensus in the latest poll was slightly stronger than 72.50 per dollar predicted last month, it reflects the currency’s gain over the past month.

However, nearly two-thirds of 24 common contributors in the October and November Reuters polls either downgraded or kept their year-ahead forecasts unchanged.

Currency speculators have cut short bets on the rupee to the lowest since mid-August, a separate Reuters poll showed.

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