Indian Rupee Tipped to Weaken as Global Headwinds and Strong Dollar

Indian Rupee exchange rates

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- Rupee to fall as global slowdown impacts on risk

- Dollar to stay strong as major counterparts struggle

- Domestic factors and action of RBI also to weigh

The Rupee will weaken into 2020 as an increasingly risk-averse global backdrop, a slowdown in the Indian economy and a relatively strong U.S. Dollar all conspire to weigh on the Indian currency, say strategists at global financial services provider MUFG.

The Tokyo-based bank says trade tensions between the U.S. and China are likely to continue with a negative knock-on effect on world manufacturing and probably also eventually the services sector.

Economists say this has already seen large outflows from relatively ‘risky’ emerging market (EM) assets into safe-haven assets and the trend will probably continue as the trade-induced global slowdown extends into the end of 2019 and start of 2020.

These currents are expected to impact on India as much as other EM countries and to have a negative effect on the Rupee as foreign investors sell Indian assets such as stocks and shares and withdraw their capital.

A continued slowdown in the Indian domestic economy will put further pressure on the currency. Recently Indian GDP data showed growth contract to 5.0% in Q2, well below expectations of 5.7% and the previous quarters 5.8% result.

Although 5.0% growth may seem relatively high compared to developed economy growth rates, it is low when compared to India’s track record, which saw it top the growth charts in 2018 with a 7.2% growth rate for that year.

Slower growth and inflation - which also remains below the 4.0% official target at 3.18% - will probably prompt the Reserve Bank of India (RBI) to cut interest rates to help stimulate the flagging economy, by making lending cheaper, says MUFG.

“Given the deceleration in India’s economic growth, RBI is set to continue cutting rates. In order to improve the monetary policy transmission, relevant financial products will be linked to the repo rate. The record INR1.23tn in dividend payment to the government by the RBI could help plug the fiscal deficit, and also help finance more fiscal stimulus measures on top of that announced in August which include a one-shot INR700bn bank recapitalisation,” say economists at MUFG in a client note.

The result will weaken the Rupee further by attracting lower foreign capital inflows and reducing demand for the currency.

“The rupee would also remain vulnerable to weak global risk sentiments and prospects of further easing by the RBI.The RBI has cut the benchmark repo rate by a cumulative 110bps to 5.40% this year,” says MUFG.

The third factor likely to weigh on the Rupee is the strength of the U.S. Dollar which MUFG sees remaining relatively strong due to the weakness of two of its key counterparts, the Euro and the Pound.

“In the coming months, we continue to expect the rupee to be under pressure as the dollar finds support from potential euro and British pound weakness due to monetary easing by the ECB and risks of a no-deal Brexit,” says MUFG.

The bank forecasts the Rupee to fall to USD/INR 71.500 by Q3, 72.000 by Q4 and 72.500 by Q1 2020.

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