Top Forecaster Sees Rupee Weakening for Fifth Year: India Credit

The top Indian rupee forecaster said the currency will weaken against the dollar for a fifth year, and that may limit the central bank’s room to cut interest rates.

The rupee is set to drop 2.6 percent to 64 a dollar by end-2015, a level last seen in September 2013, from 62.30 today, according to ABN Amro Bank NV, which had the most accurate estimates in the last four quarters in Bloomberg’s rankings. That matches the prediction by ING Vysya Bank Ltd., which came third, while Scotiabank, the fourth best, forecasts a decline to 65. The currency fell 2 percent last year, completing its longest losing streak since 2001.

Global funds bought the least Indian debt in eight months in December as the prospect of the Federal Reserve raising U.S. borrowing costs dimmed the allure of emerging-market assets. Reserve Bank of India Governor Raghuram Rajan, who said Dec. 2 he may ease policy in early 2015, will have less room to act if the rupee drops more than expected, according to ABN Amro.

“If financial markets get too jittery and the dollar strengthens much faster against the rupee, then that would give less flexibility to the central bank to cut rates,” Roy Teo, a strategist in Singapore at the Dutch lender, said in a Jan. 7 phone interview. While the rupee has become less vulnerable, the currency along with Indonesia’s rupiah is likely to be the most at risk when investors pull funds from Asia, he said.

‘Fragile Five’

The rupee has surged 10.5 percent from an all-time low in 2013, when Morgan Stanley dubbed currencies of India, South Africa, Brazil, Indonesia and Turkey the “fragile five,” because of difficulties in drawing capital to finance trade deficits. The rupiah has weakened 11 percent in the same period.

India’s currency weakened 1.6 percent in December as foreign funds turned net sellers of local equities for the first time in eleven months and bought $1.9 billion of corporate and government debt, the least since April, exchange data show.

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 global peers, surged 11 percent last year, the biggest jump in data going back to at least 2005.

“Broad dollar strength, which we expect to be the key theme through 2015, should be supported by Fed rate hikes, and pressure the rupee,” Sacha Tihanyi, a Hong Kong-based currency strategist at Scotiabank, said in a Jan. 7 e-mail interview. “The current-account gap will continue to be a fundamental source of weakness for the rupee, particularly during periods of high global financial-market volatility.”

Improved Trade

The July-September shortfall in India’s broadest measure of trade widened to $10.1 billion from $7.8 billion the previous quarter, the RBI reported Dec. 8. The gap amounted to 2.1 percent of gross domestic product, lower than the 2.5 percent level the central bank considers sustainable.

Citigroup Inc. estimates India’s current-account gap will narrow to 1.3 percent of GDP in the year ending March 2016, from 1.6 percent in the current fiscal period.

The best forecasters in Bloomberg’s rankings were identified by averaging individual scores on margin of error, timing and direction during the past four quarters. The score of 73.83 registered by ABN Amro topped National Australia Bank Ltd., which came in second at 71.94.

Attractive Bet

NAB said the rupee will stay an attractive bet as a 54 percent slump in oil prices since June narrows the current-account deficit and Prime Minister Narendra Modi’s reforms boost growth in Asia’s third-largest economy. The Australian lender predicts the currency end this year at 62.80.

“Rising confidence in Modi and Rajan will drive overall growth higher and be a helpful buffer for the rupee,” Christy Tan, Hong Kong-based head of markets strategy at NAB, said in a Jan. 7 e-mail interview. “The attractiveness of Indian assets has increased as rate-cut expectations help the rupee’s resilience against a rising dollar.”

The rupee will end the year at 62.50, according to the median estimate of 31 analysts surveyed by Bloomberg. Investing in rupees will earn about 9 percent including interest, based the projections, the most in Asia.

The 10-year sovereign yield fell 97 basis points in 2014 on optimism slowing inflation will prompt Rajan to cut the 8 percent repurchase rate. It fell one basis point today to 7.85 percent.

“The dollar’s strength will continue and weigh on the Asian currencies,” Navin Raghuvanshi, a currency trader at DCB Bank Ltd. in Mumbai, who expects the rupee to weaken to as low as 65 a dollar by the year-end, said by phone yesterday. “There’s no way the rupee can hold on to current levels.”

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