India’s currency is poised to weaken this year as the central bank seeks to cushion the economy from excessive appreciation, according to Deutsche Bank AG.
Though the rupee hit a record low in November, it was broadly stable through the year, slipping just 2.7 percent against the dollar. In real effective terms, which adjust for inflation differences and measure the currency against trading partners’ counterparts, it climbed about 16 percent from the end of 2013 through 2016, according to the Bank for International Settlements.
“It is unlikely that the RBI will tolerate a persistent appreciation of the real exchange rate in the months ahead, as it leads to a loss of export competitiveness, which could hurt growth,” Kaushik Das and Taimur Baig at Deutsche Bank wrote in a Jan. 27 note, referring to the Reserve Bank of India. “Clearly, further real appreciation of the rupee needs to be arrested.”
The relative stability of the rupee last year reflected India’s low trade and current-account deficits and a surge in foreign direct investment inflows, the Deutsche bank analysts said.
The economists forecast that the rupee, which was at 68.04 per dollar late Friday, will fall past the 70-mark this year. Along with prospects for US Federal Reserve interest-rate hikes that boost the dollar, they anticipated the RBI will take opportunities to bolster its foreign-exchange reserves during the year — selling rupees in the process.
“With global financial markets expected to be volatile in the period ahead, the RBI would need to buy dollars at every opportune moment to shore up more
reserves,” Das and Baig wrote.