The rupee has hit repeated record lows against the dollar this year in its worst run since the financial crisis.
India's battered rupee is expected to stay that way for a while, trading near recent record lows over the coming year even as the Reserve Bank of India is forecast to raise rates in December and once more in 2019, Reuters polling found.
The rupee has hit repeated record lows against the dollar this year in its worst run since the financial crisis. It is down over 16 per cent so far this year, tracking a deep selloff in emerging markets driven by a resurgent dollar and the ongoing US-China trade war.
While just two weeks ago a majority of economists polled by Reuters predicted the Reserve Bank of India (RBI) would hike interest rates on Oct 5, the central bank surprised by keeping its policy unchanged and said it was not targeting any currency level.
After that decision, the rupee fell to a record low of 74.25 against the dollar. On Tuesday, the partially convertible Indian currency hit a fresh low of 74.395 per dollar.
"We believe the RBI is underestimating the inflationary pressure in the Indian economy and the impact of ongoing Fed tightening," said Hugo Erken, senior economist at Rabobank, referring to a series of US Federal Reserve rate rises expected in the coming year.
Inflation in India was forecast to be a touch above the central bank's comfort level of around 4 per cent in the third quarter and the current one.
But India's widening current account deficit, thanks to rising oil prices and a weak rupee, combined with below-normal rainfall this year could translate into rising price pressures over the near term.
While economists were evenly split on the question of whether a rate hike was required to stop the rupee from falling further, the RBI is still expected to deliver in December. It is also forecast to follow that hike in the third quarter of next year, taking the repo rate to 7 per cent.
That suggests economists have pushed their expectations for the rate hike they had previously pencilled in for October to the next meeting, the last one scheduled for this year.
"Even as most (on the Monetary Policy Committee) voted to change the stance to 'calibrated tightening,' there was an evident lack of action on their part despite time running out to stop the rupee's worst fall in last five years," noted Prakash Sakpal, Asia economist at ING.
Still, 26 of 47 economists who answered an additional question said the RBI was right to keep policy on hold this month.
Predictions for one aggressive 50 basis point rate hike by end-2018 dropped sharply in the latest survey, with only one respondent now expecting such a move compared to 17 in the previous poll on September 25.
"We continue to look for the USDINR to head towards 75.0, factoring in our view of at least four rate hikes by the US Federal Reserve over the year, which will be dollar and rates positive," noted Radhika Rao, economist at DBS Group Research.
The latest Reuters poll of over 50 currency strategists taken Oct. 5-9 showed the rupee was seen trading around the current rate, about 74 per dollar, in three months and strengthening just a bit to around 73 per dollar in a year.
The weakest forecast across was 78.0 while the strongest rupee outlook was 67.97 compared to 75.6 and 66.1, respectively, in the previous month poll.
But in a year, the rupee's expected performance is broadly in line with expectations for most currencies as the dollar's resurgence is predicted to fade.
A majority, 27 of 48 analysts, said the risks were skewed more towards the rupee strengthening against the greenback over the next year.