Forecasters project that the Indian rupee will decline in value against the dollar for a fifth consecutive year in 2015, limiting chances that the central bank will slash interest rates in the country.
Indian Rupee Set to Weaken Against the Dollar For a Fifth Year
ABN Amro Bank NV reports that by the end of 2015, the rupee will drop by 2.6 percent to 64 against the dollar. Data by ING Vysya Bank Ltd and Scotiabank show more or less the same numbers with an anticipated drop to 65. In 2014, the rupee fell by 2 percent proceeding with its losing trend since 2001.
Predictions that the Federal Reserve will raise borrowing costs in the U.S. put a dump on the attractiveness of assets in the emerging-markets, a region that India belongs to. If the rupee continues with its losing streaks, the Reserve Bank of Indian will have a difficult time easing its monetary policy in 2015.
According to Roy Teo, a Singapore based financial strategist, “If the markets become too jittery and the dollar continues to strengthen against the rupee, the central bank will have less flexibility in cutting the rates.” However, in the event that investors withdraw their funds from Asia, the Indonesia rupiah will feel the effects more than the rupee would.
Fragile emerging markets
Presently, most of the emerging markets including India, Turkey, South Africa, Indonesia and Brazil are having a hard time finding capital to fund their trade deficits. At the latter end of December, the rupee weakened by 1.6 percent as foreign investors sold their local equities and bought corporate and government debt worth $1.9 billion.
The robust strength of the dollar is expected to go on throughout 2015 and will likely weigh in on the rupee for the rest of the year. The prevailing trade deficit in India will continue to see the Indian currency weaken against a background of high financial volatility globally.
However, market reports show that trade accounts in India will improve toward 2016 to and will likely stand at 1.3 percent down from the present 1.6 percent deficit.
Market impact on Indian currency
- Market analysts continue to see the rupee as a laudable bet against a gradually narrowing of the current account deficit that can be attributed to a slump in oil prices.
- Economic reform on India’s monetary policy is also expected to boost growth and to buffer the currency. The rupee’s resilience against the robust dollar has increased the allure of Indian assets.
- According to estimates by analysts, the rupee is predicted to close year 2015 at 62.50 against the dollar. Investors are set to earn up to 9 percent inclusive of interest from the rupee.
- The growing strength of the dollar is expected to push the rupee to as low as 65 against the dollar. The same trend is expected for most other Asian currencies.
- All things equal, analysts expect the rupee to trade sideways thanks to a persistent strengthening of the dollar. At the same time, an anticipates rise of crude oil prices as well as recovering market sentiments are expected to support a relatively resilient rupee.