Photographer: Dhiraj Singh/Bloomberg

Top Forecasters Split on Rupee After Best Rally Since 2014

Updated on
  • HDFC predicts currency to weaken by March as Fed raises rates
  • Strong India economic growth will lure overseas investors: NAB

The Indian rupee’s top two forecasters are at odds as to how vulnerable the world’s fastest-growing major economy is to outside shocks.

HDFC Bank Ltd., which had the most accurate estimates in Bloomberg’s quarterly rankings, sees U.S. Federal Reserve policy tightening driving a 2.4 percent decline in the currency to 68.50 per dollar by March 31, from 66.89 on Monday. National Australia Bank Ltd., placed second, says the rupee will strengthen to 66.20 as economic growth and a narrowing current account deficit help offset any outflows from emerging markets.

“The rupee could take a bit of beating along with other regional currencies,” said Tushar Arora, HDFC’s senior economist for treasury based near New Delhi. The Fed’s December decision “could lead to uncertainty in global financial markets and a risk-off episode,” he said.

HDFC’s view the rupee will weaken toward its record low of 68.845 set in August 2013 was bolstered Thursday, when the currency slid the most in three months after Fed minutes boosted the case for higher U.S. rates. India’s currency strengthened 1.4 percent in the third quarter, the most in two and a half years, and National Australia Bank says foreign investors will keep buying.

‘Strong Growth’

“India is experiencing relatively strong growth, which should attract inflows,” said Julian Wee, senior markets specialist for Asia at the lender in Singapore. “Gradual lowering of the policy rate should also benefit both local equities and bonds, while leaving a still-healthy carry premium over the dollar and many other Asian currencies.”

India’s economy may expand 7.7 percent this year, up from 7.6 percent in the previous 12 months, according to the weighted average forecast in a Bloomberg survey of analysts.  Ten-year bonds yield 6.75 percent, the second-highest among major Asian markets after Indonesia, a further attraction for overseas investors.

Signs of imminent U.S. tightening have seen the currency decline 0.4 percent so far in October, after three successive months of gains. Global funds cut their holdings of rupee debt by 64.7 billion rupees ($968 million) this month through Friday.

The rupee is also under pressure as an estimated $26 billion in deposits made by non-resident Indians in 2013 started to mature in September. The RBI predicts that $20 billion of this will leave the country by year-end. India’s foreign-exchange reserves fell by $4.3 billion in the week ended Oct. 7, the biggest decline since May 2014, signaling to some investors that the central bank is using the hoard to meet this redemption pressure.

“While we expect the situation to remain largely managed, there could be short-term liquidity mismatches, which could lead to some volatility in the exchange rate,” HDFC’s Arora said, referring to the outflows on account of maturing deposits.

This table shows the most accurate forecasters of the rupee in the four quarters ending Sept. 30.

1HDFC Bank
3BMO Capital Markets
5Wells Fargo
6RHB OSK Securities

Source: Bloomberg FX Forecast Accuracy Rankings

The Bloomberg rankings are based on forecasts submitted during the four preceding quarters. They are ranked based on margin of error, timing and directional accuracy.

The rupee has strengthened 2.8 percent from its recent low of 68.7875 set in February as the current-account deficit has narrowed and inflation has slowed, boosting confidence in Asia’s third-largest economy. Prime Minister Narendra Modi was able get parliamentary approval for a national sales tax in August, a move that should bolster government revenue going forward.

“The RBI will probably be quite keen to keep the rupee somewhat stable against the dollar, which should be fairly manageable given the strong growth rate and the attractive carry,” National Australia Bank’s Wee said. “We continue to see mild and broad upside in the dollar, but the rupee should outperform within the region.”

— With assistance by Wei Lu

(Updates with closing rupee level in the second paragraph.)
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