India’s battered rupee is expected to stay that way for a while, trading near recent record lows over the coming year even as the Reserve Bank of India is forecast to raise rates in December and once more in 2019, Reuters polling found.
The rupee has hit repeated record lows against the dollar this year in its worst run since the financial crisis. It is down over 16 per cent so far this year, tracking a deep selloff in emerging markets driven by a resurgent dollar and the ongoing US-China trade war.
While just two weeks ago a majority of economists polled by Reuters predicted the Reserve Bank of India (RBI) would hike interest rates on Oct 5, the central bank surprised by keeping its policy unchanged and said it was not targeting any currency level.
After that decision the rupee fell to a record low of 74.25 against the dollar. On Tuesday, the partially-convertible Indian currency hit a fresh low of 74.395 per dollar.
‘We believe the RBI is underestimating the inflationary pressure in the Indian economy and the impact of ongoing Fed tightening,’ said Hugo Erken, senior economist at Rabobank, referring to a series of US Federal Reserve rate rises expected in the coming year.
Inflation in India was forecast to be a touch above the central bank’s comfort level of around 4 per cent in the third quarter and the current one.
But India’s widening current account deficit, thanks to rising oil prices and a weak rupee, combined with below-normal rainfall this year could translate into rising price pressures over the near term.
While economists were evenly split on the question of whether a rate hike was required to stop the rupee from falling further, the RBI is still expected to deliver in December. It is also forecast to follow that hike in the third quarter of next year, taking the repo rate to 7 per cent.
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