Rupee's slide may continue despite higher rate cut expectations: Survey

The Indian rupee will extend its steady decline against a strong US dollar amid heightened market expectations of a Reserve Bank of India interest rate cut next month, a Reuters poll of foreign exchange strategists found.

Predictions in the latest poll for the rupee were barely changed from last month. That is despite the unexpected departure of former Reserve Bank of India Governor Shaktikanta Das and arrival of his successor, Sanjay Malhotra, whose views on monetary policy are unknown. 

 

The rupee was forecast to remain near Thursday's 85.84 per dollar and to be at 85.50 in three months, before weakening to 86.00 in six months, according to the Jan. 3-9 Reuters poll of 42 foreign exchange analysts.

 

It was expected to lose nearly 1 per cent by year-end, reaching 86.50, a smaller decline compared to last year when the rupee fell 2.8 per cent. It has fallen about 15 per cent over the past three years.

"The rupee has been much more stable and stronger than its fundamentals would suggest. I think the RBI can allow a little bit more adjustment in line with regional currencies," said Michael Wan, senior currency analyst at MUFG.

The rupee is currently overvalued by 8 per cent compared to its trading peers, according to RBI data on the real effective exchange rate.

While remaining the fastest-growing major economy, growth in India has slowed to just above 5 per cent and markets expect a rate cut from the RBI in February, despite inflation sticking well above the RBI's 4 per cent medium-term target.

This, along with further strength in the US dollar, could place further pressure on the rupee, suggesting the RBI may need to ramp up its regular interventions in currency markets in the coming months.

But in response to an additional question, a strong majority of analysts - 15 of 21 - said the RBI would reduce its pace of market intervention in the near term.

"Intervention should be a last resort, as it was in the past. You don't have to eliminate volatility to manage it - some is necessary for hedging," said K. K. Mital, senior economist at Venus India.

"Markets expect the new governor to cut rates in February, but I don't think that should happen. It...could backfire by fueling capital outflows."

Foreign investors have removed around $2 billion dollars from India's stock market since the start of the year.