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The rupee is unlikely to regain ground against the US dollar over the next year as a wide current account deficit and weak reserves weigh on the currency, while the Chinese yuan will strengthen a little to fresh record highs, a Reuters poll showed.
The rupee has lost around 12% to the dollar since the beginning of May after the US Federal Reserve said it would begin reducing its stimulus to the economy, prompting foreign investors to sell assets in emerging markets ranging from India to Brazil.
It hit a record low of 61.80 to the dollar on Wednesday.
Although the Fed toned its view soon after saying that any withdrawal of stimulus would depend on brighter economic conditions, the sell-off in emerging markets threw into stark relief the structural problems in the Indian economy.
The poll of 17 analysts taken over the past week showed a bleak outlook for the rupee, which is expected to trade around 61 by the end of August, 59.75 in six months and 60.50 by July next year.
Those predictions are not far from Thursday's closing rate of 60.72, although they are markedly weaker than a similar poll last month which showed the rupee would strengthen to 57.50 by June 2014.
India's record current deficit, currently at 4.8% of gross domestic product, is the primary reason behind the fall in the currency.
"It will be a bumpy ride ahead for the rupee," said Sook Mei Leong, ASEAN head of global market research at BTMU in Singapore.
"India's almost insatiable demand for oil and gold are the main reasons for structural weakness in the current account deficit (CAD). The rupee could enjoy some respite if the US dollar underperforms, and/or the CAD narrows."
While the government has announced steps to curb gold imports, elevated global crude oil prices could inflate country's import bill further.
India on Tuesday appointed Raghuram Rajan, economic advisor to the prime minister, as the next governor of the Reserve Bank of India (RBI). A former chief economist at the International Monetary Fund, Rajan is widely credited with accurately predicting the credit-crisis-fuelled recession.
While markets cheered the decision and pushed the rupee higher, the currency soon fell back to record lows on concerns the RBI had limited tools to support it.
The RBI has tried in vain to support the currency by tightening liquidity conditions, but the meagre $280 billion of reserves, just enough to pay for seven months of imports, has also limited the central bank's options.
That, as well as the Fed's plan to reduce its $85 billion a month bond purchases will likely pressure the rupee over the next few months, say analysts.
Samir Lodha, senior partner at QuantArt in Mumbai, has a different view. He forecasts the rupee to gain to 57 per US dollar in a year.
"The impact of the Fed's tapering is probably over-hyped. Even if the Fed tapers its stimulus, its economy is far from being out of the trenches," he said.
"Even without quantitative stimulus, zero interest rates still means the Fed's policy is accommodative. That will likely bring investors back to emerging markets which can yield better returns on their investments."
Domestic forwards markets, which reflect market expectations, see the rupee trading at around 65 to the dollar in a year, while offshore forward markets see it at 66.
Modest Yuan Appreciation
The poll also showed the Chinese yuan will firm slightly to 6.07 in 12 months, unchanged from the July poll, even as the currency hit an all-time intraday high on Thursday, bucking a weak trend in emerging market currencies.
The People's Bank of China (PBOC) set its official mid-point at 6.1668 on Friday, up 0.04% from Thursday. It has allowed the yuan to appreciate though its official reference rate every day this week.
The central bank appears to be using a recent weakening in the dollar index and China's better-than-expected July trade performance as a reason to guide the yuan higher, traders said. It has gained 1.85% so far this year, bucking the weak trend in emerging market currencies, but the bulk of its gains were logged in April and May.
"The PBoC is expected to moderate the yuan's rise. There are signs the central bank may widen the trading band once they are able to implement concrete economic reforms," said Roland Ang, analyst at Informa Global Markets.
