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The rupee will remain weak against the dollar over the coming year on expectations that an impending rate hike by the Federal Reserve will boost US bond yields and investors will shun emerging economies, a Reuters poll showed.
Bond yield differentials traditionally drive currencies by influencing where investors put their money but massive amounts of central bank stimulus and money printing since the financial crisis has dented yields in developed economies.
Currency strategists predict that is likely to change as financial markets prepare for the first interest rate hike in almost a decade in the world's largest economy.
"We think that India remains vulnerable to the prospects of higher yield and the core global developed market especially to the prospect of higher Treasury yields," said Dariusz Kowalczyk, currency strategist at Credit Agricole CIB.
"We expect Treasury yields will rise significantly this and next year as a result of Fed tightening and this will cause capital outflows from emerging markets to the US and also to some degree to the European markets where yields on core European bonds will also increase."
Expectations of a Fed rate hike in the third quarter, coupled with an unprecedented easing cycle by global central banks, has already fueled a nearly one-directional 20% dollar rally since last summer.
Benchmark US 10-year Treasury yields also have risen some 25 basis points since the start of the current quarter, more than half of that just in the last few trading days.
Although the greenback cooled off on news that US economic growth stalled in the first three months of the year, a Reuters poll on Wednesday showed the dollar was just pausing and would soon resume its strong rally.
The poll of over 25 foreign exchange analysts this week predicted the rupee will trade at 63.47 a dollar by May-end, 63.70 in three months and at 64.00 in six and twelve months. It was trading around 64.00 on Friday.
Still, while the currency is not expected to strengthen from current levels, it is also unlikely to weaken as it did in late 2013 after the Fed announced it would begin tapering its stimulus programme.
The rupee has weakened around 2% since the start of this year, touching a 20-month low on Thursday, as concerns over New Delhi's policy to implement a minimum tax on foreign investors spooked markets and led to big capital outflows.
However, strategists said the Reserve Bank of India's large currency reserves will cap any sharp declines in the rupee.
The recent recovery in the price of crude oil, India's biggest import, is also likely to bump up the country's trade deficit and pressure oil companies to buy more dollars.
The poll also showed the Chinese yuan would remain largely range-bound over the coming year due to the central bank's efforts to insulate the economy and protect both exporters and mainland companies.
Analysts predict the yuan will trade around 6.21 a dollar in one month, 6.21 in six months and 6.17 by end-April 2016.
"We think the yuan will experience a little bit of seasonal volatility but by and large it will be fairly stable due to a lot of intervention by the central bank on both sides - buying and selling the currency," Kowalczyk said.
He added an appreciation would hurt China's exports while a depreciation would spell trouble for businesses that have foreign currency debt - situations China wants to avoid.
The People's Bank of China is widely expected to ease policy further to boost flagging growth by increasing credit supply and investment - considered the pillars of the world's second-largest economy.
