Weak growth to pull down rupee, coronavirus fears to impinge: Poll

By Reuters

  • 06 Feb 2020
Credit: Reuters

The battered Indian rupee will weaken further against the dollar over the coming year as a significant pickup in economic growth is unlikely, according to a Reuters poll of strategists who said the coronavirus outbreak was a downside risk.

While Reserve Bank of India Governor Shaktikanta Das has said reviving growth was a 'national objective' in coordination with the government, the latest budget provided only minimal support to the slowing economy.

That comes as a deadly coronavirus epidemic that is spreading globally has spooked investors and sent them rushing for cover into safe-haven assets and shunning emerging markets.

A wider Reuters poll showed fear will keep the U.S. dollar, which has dominated for around two years, on top well into 2020 as well as the yen and Swiss franc - all three viewed as de facto safe-haven currencies.

In response to a separate question in the wider poll, nearly 90% of analysts said emerging markets currencies were most at risk of a significant weakening over the next three months.

"We have to recognize that if the global economy is going to slow, especially with what is happening in China, it is very difficult for the other currencies to show very substantial appreciation mainly in the case of the rupee," said Leong Sook Mei, ASEAN and India head of global markets research at MUFG - the most accurate forecaster in Reuters polls for Asian currencies in 2019.

"If sentiments continued to be constrained by concerns over the coronavirus, the rupee will not be an outlier in an EM sell-off relating to the virus which is on top of other domestic factors which are potentially rupee negative."

The Indian currency has lost around 1% in the past 15 days and the Feb. 3-5 poll of over 50 strategists predicted the rupee would have slipped a touch over 1% against the dollar to 72.00 in a year. It was trading around 71.20 on Wednesday.

Analysis showed the standard deviation of forecasts, a commonly used gauge of dispersion, for the 12-month outlook was the lowest in over two years, suggesting most strategists thought the currency would depreciate further.

The central bank was expected to keep rates on hold at its meeting later on Thursday due to rising inflation concerns, despite economic growth at its weakest in 26 quarters in the three months to September and forecast to be the slowest since the financial crisis in the current fiscal year.

While forecasts were downbeat for growth, the government has projected a fiscal deficit target of 3.5% for next fiscal year, indicating limited scope for massive spending to boost output.

Foreign investors have pumped over $1 billion into Indian stocks so far this year, which is generally positive for the rupee, but strategists said the poor growth outlook would require a weaker currency to improve competitiveness.

"I don't see the RBI allowing appreciation pressures to result in sustained upward move in the rupee," said Mitul Kotecha, senior EM strategist at TD Securities.

"As the economy is still likely to remain under pressure in the months ahead, the currency will be used as a tool to try and help to boost growth. Especially at a time when the RBI's hands have become more restrained because of the inflation spike."