Rupee seen facing more punishment, but no new record low

 The battered Indian rupee will take another bruising this year, despite a recent revival, weighed down by uncertainty around national elections in May and an expected economic slowdown, a Reuters poll found.

While the currency recovered nearly 6 percent after touching a record low of 74.485 per dollar on Oct. 11, the Jan. 2-8 poll of more than 65 analysts showed the rupee will weaken again.

However, fewer than 20 percent of contributors in the latest poll expected the rupee to breach that all-time low in the next 12 months, compared to nearly 50 percent in a November survey and about one-third in December.

After falling about 9 percent in 2018 – its biggest decline since Prime Minister Narendra Modi took office in 2014 – the Indian currency was forecast to weaken 1.9 percent to 71.50 per dollar in a year, from about 70.20 on Tuesday.

Two-thirds of those who gave a year-ahead forecast predicted the currency to be weaker – trading at more than 70 per dollar, with the most pessimistic call at 80. The others either had it around where it is now or a touch stronger.

“Overall there’s nothing to be greatly optimistic about the rupee. There are lots of uncertainties, both on economic and political fronts lingering as we enter into 2019,” said Prakash Sakpal, Asia economist at ING, adding that elections and political uncertainty pose “the biggest risk”.

“Things could go either way. We might see the BJP (Bharatiya Janata Party) retaining its power by a very thin margin. On the other extreme, there could be a coalition. This would obviously not be viewed by the international community positively, which of course is going to be bad for the currency,” Sakpal said.

A deep sell-off in emerging market currencies last year was triggered by a resurgent dollar and the U.S.-China trade war, making the rupee the worst-performing major Asian currency in 2018.

In recent weeks, the dollar has lost momentum on economic growth worries in the U.S. and a dialing back of rate hike expectations, benefiting emerging market currencies – with the MSCI emerging market currency index rising to levels last seen in late July.

But growth conditions in most emerging economies aren’t much to write home about either, potentially limiting the upside for those currencies.

The rupee’s path this year will largely be determined by the results of national elections in May, oil price moves and the Reserve Bank of India’s policy.

With foreign outflows from Asian equities the biggest in at least seven years in 2018, the U.S.-China trade war and a widening Indian fiscal deficit at a time of slowing economic growth globally, the rupee is not likely to rise.

India’s government is expected to miss its deficit target of 3.3 percent of gross domestic product this fiscal year as data showed the April-November deficit was already 115 percent of the budgeted target.

That poses a big threat to economic expansion. India’s annual economic growth fell to a worse-than-expected 7.1 percent in the July-September quarter.

“Slowdown will become a trend this year, especially as external demand will remain on a weakening path, whereas without much downside in oil prices, imports will remain elevated, so we should see a bigger hit to GDP growth from continued widening in the trade deficit this year,” added ING’s Sakpal.

But not everyone was convinced about a weaker rupee, as expectations of fewer U.S. Federal Reserve rate hikes are likely to restrain the dollar from making further gains.

“We see the retreat in global oil prices and a pause in the Federal Reserve hiking cycle outweighing domestic concerns,” said Rini Sen, FX strategist at ANZ. “This will see the rupee regain lost momentum, but much of this reversal is expected to come post the general elections in mid-2019.”