Informist, Friday, Oct 1, 2021
By Arushi Jain and Richard Fargose
MUMBAI - The rupee is seen weaker against the US dollar for the second consecutive month in October as fears that the US Federal Reserve will wind down its asset purchase programme sooner than expected are likely to weigh on emerging market currencies.
Inflow of foreign funds into emerging markets are seen declining because of a rise in US bond yields and the possibility that the global financial system will not remain as flush with liquidity.
The median of estimates of 11 respondents with banks and corporates polled by Informist sees the Indian currency settle at 74.50 a dollar by the end of October. Today, it closed at 74.1150 a dollar.
The US dollar and Treasury yields have surged since last week after the Fed indicated at its latest policy meeting that it envisaged a sooner-than-expected tapering of its asset purchases, as well as an earlier-than-expected hike in interest rates.
"There is potential that (foreign) inflows will slow down because Fed has already announced they will start reducing their monthly bond purchases. So overall that will lead to rupee depreciation," said Shashank Mendiratta, economist at IBM.
In September, the Indian currency fell 1.65% against the dollar to settle at 74.2250 per dollar. During the same period, the dollar index gained 1.73% on concerns over asset tapering by the Fed.
Elevated crude oil and metal prices globally are also expected to put pressure on the rupee by increasing India's import bill, most poll participants said.
However, most participants said the rupee is unlikely to see a sharp depreciation. In fact, it is expected to outperform peers like the Brazilian real and Russian ruble when the Fed does start tightening its monetary policy.
"The RBI has fully seized the opportunity offered by the surge in global liquidity, fall in oil prices due to the COVID-19 shock to build its forex reserve, and this reserve will now act as a solid cushion if foreign flow direction reverses," said a senior foreign exchange dealer with a state-owned oil company.
The Reserve Bank of India has bought over $180 bln in the spot as well as in forwards markets since March 2020, and India's forex-reserve import cover has risen to 11.7 months from seven months in the 2014 taper year, a report by CLSA said.
Market participants are of the view that RBI will continue to favour the rupee's depreciation in line with peer currencies, and will step in to manage the exchange rate only once the rupee weakens to the psychologically-significant level of 75 per dollar.
Data from larger economies, especially the US and China, is also likely to drive investor risk sentiment globally, given that mixed data in recent weeks indicated uneven recovery amid hints of monetary policy normalisation by major central banks.
POLL DETAILS
| Participants | Oct-end | Dec-end |
| Bajaj Corp | 74.00-75.00 | 74.00-75.50 |
| Bandhan Bank | 75.50 | 76.00 |
| Edelweiss Financial Services | 74.50 | -- |
| Federal Bank | 73.75-75.00 | 73.50-75.50 |
| HDFC Bank | 74.00-75.00 | 74.50-75.50 |
| IBM India | 74.80-75.10 | 75.40-75.60 |
| ICICI Bank | 73.50-75.00 | -- |
| India Ratings | 73.00-74.00 | 73.00-74.00 |
| Karur Vysya Bank | 73.60-75.10 | 73.40-76.00 |
| Kotak Mahindra Bank | 74.00-74.75 | 74.50-75.25 |
| Large State-owned oil Co | 74.50 | 75.50 |
| Standard Chartered Bank | -- | 75.50 |
| Median | 74.50 | 74.94 |
* The mid-point of inputs in a range has been taken for arriving at the median.
End
US$1 = 74.1150 rupees
Edited by Snigdha Kuttikat
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