Forecast For Historic Rupee Low Grows As Crude Oil Prices Widens Deficit

Indian rupee may drop to between 79 to 81 per dollar over the next few months, said analysts from UBS AG to Nomura Holdings and Bloomberg Economics

Rising oil prices threaten to widen the current-account deficit to at least 3 per cent of the gross domestic product, compared to a 2 per cent sustainable level

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The Indian rupee may slide further in the months to come, news agency Bloomberg reported quoting analysts and forward markets. In May, the rupee declined to a historic low.

According to the report, the currency may drop to between 79 to 81 per dollar over the next few months, said analysts from UBS AG to Nomura Holdings and Bloomberg Economics. Besides, forwards are also pricing in a similar weakness for the rupee.

The rupee could drop as much as 4 per cent from current level, stem from a deterioration in India’s external finances. Rising oil prices threaten to widen the current-account deficit to at least 3 per cent of the gross domestic product, compared to a 2 per cent sustainable level, according to UBS, even as outflows from its equity markets accelerate.

Rohit Arora, emerging markets Asia strategist at UBS, said, “A grind higher for USD/INR from here toward 80 in the next couple of months is not a big ask. Nor do I think 80 is a runaway depreciation by any metric. It’s a very modest adjustment of a currency with deteriorating fundamentals.”

In May, the rupee sank 1.6 per cent in May, the biggest fall among emerging Asian currencies, which spurred Reserve Bank of India (RBI) Governor Shaktikanta Das to say that the central bank won’t allow a runaway depreciation of the currency. He said that the current account deficit can still be comfortably funded this year.

The RBI has foreign exchange reserves of about $600 billion and has been using this pile to smooth out any volatility.

Rupee traders will look forward to its monetary policy review on Wednesday, where it’s expected to raise interest rates after an out-of-policy hike in May.

Bloomberg Economics predicts the rupee will fall to 81 a dollar by the end of November. Nomura Holdings sees the currency at 79 by end June, while Standard Chartered Plc also sees a similar level by the third quarter. The Rupee closed at 77.63 on Friday.

Divya Devesh, head of ASEAN and South-Asia FX research at Standard Chartered in Singapore, “We have been a little more bearish than consensus because we think the underlying balance of payments dynamics have deteriorated quite significantly."