By Anant Chandak and Vivek Mishra
BENGALURU (Reuters) – The outlook for the Indian rupee is little changed from last month as interventions by the Reserve Bank of India keep the currency, considered expensive compared to peers, in a narrow range, a Reuters poll of foreign exchange analysts showed.
A sharp decline in global stock markets linked to a sudden unwinding of carry trades, as investors borrow in cheap currencies to invest in higher-yielding assets elsewhere, pushed the rupee to an all-time low of 83.96 against the dollar on Tuesday.
The Reserve Bank of India’s intervention in the foreign exchange market may have limited the currency’s decline to 0.25%.
This trend is unlikely to change anytime soon, as analysts in a poll conducted from August 1 to 6 did not change their expectations compared to a poll conducted in July.
The median forecast showed the rupee trading at $83.55 and $83.40 by the end of October and end of January respectively, from around $83.95 on Tuesday. It was expected to rise about 1% to $83.00 within a year.
Fiona Lim, chief FX strategist at Maybank, said the rupee/dollar pair is very difficult to forecast. “This is likely partly due to the Reserve Bank of India’s tendency to rely on the wind to limit volatility,” she added.
“The main risk to our outlook is… if there is too much scrutiny, perhaps from the US Treasury, on keeping the rupee artificially weak,” Lim said. “While this is unlikely, a combination of higher inflation for a longer period and weaker (economic) growth outcomes for India could also threaten our outlook.”
The trade-weighted real effective exchange rate (REER) of the rupee stood at 106.54 in June, according to the Reserve Bank of India’s monthly bulletin, indicating that the currency is overvalued by more than 6%.
The partially convertible currency has become the relatively more expensive currency compared to its trading counterparts since December 2017.
“Domestic policy is focused on boosting manufacturing and exports, which is what we may need, a slightly cheaper currency, but the current account deficit trends have been in favour of a less valuable currency,” said Dheeraj Nim, foreign exchange strategist at ANZ.
“India is now in overvalued territory, so the effect of political intervention is to prevent further overvaluation of the currency now. As long as the RBI is keen to build up these reserves and use them from time to time to smooth out volatility, this process may continue.”
(For more information on the Reuters Foreign Exchange Rates Survey for August, click here.)