Dutch bank ABN Amro have this week upgraded their forecast for the Indian rupee. The bank now believes that the year will end with the rupee buying 0.0155 US dollars (USD/INR 64.5), and while this is not a significant increase on the rupee’s current valuation at 0.0154 (USD/INR 65.0), it marks a significant upward revision to the bank’s previous forecast of 0.0148 (USD/INR 67.5).
ABN believe that rupee strength will be supported in the second half of 2017 by positive investor sentiment but they do also place a warning on expecting too much from India’s currency.
Although they believe the rupee will finish the year strongly, ABN say that an expected reduction in the interest rate premium held by India over the US will work to weaken demand for rupees. ABN expects India’s central bank, the Reserve Bank of India, to cut interest rates this year from their current level of 6.25%, while the US Federal Reserve is widely expected to continue with monetary policy tightening by hiking rates at least once more in 2017.
Other potential threats to the rupee in 2017, according to Money Control’s Abhishek Goenka, are ones that affect emerging market currencies as a collective group, and include the possibility that the Trump administration will go on to implement economy boosting and highly inflationary policies in the US, such as tax cuts, deregulation and up to $1 trillion in infrastructure spending, all of which were promised by Trump on the campaign trail but have so far failed to materialize. A more attractive US economy and dollar would make emerging market investments less attractive, thinks Goenka.
Goenka also points to the recent trend of hawkishness by the world’s major central banks, which is crucial to the current narrative for emerging market currencies.
In the past few weeks, investors have been surprised by the upbeat rhetoric coming from the European Central Bank, Bank of England and Bank of Canada. This significant change in the stance of central bankers globally, many of whom were suggesting earlier in the year that rate cuts were still on the table, creates a difficult trading environment for emerging market currencies. Simply, as interest earned on the currencies of developed, safer nations rises, the comparative risk-adjusted returns earned on emerging market currencies look less favourable, thereby weakening demand for them.
A Great Start, but the Rupee Has Fizzled Out
The rupee started 2017 better than any could have expected, gaining more than 6% against the dollar between January and April 26th – an impressive move for a currency which, in the entirety of 2016, traded in a range equivalent to just 4.5%.
However, since late April, the rupee has, for the most part, traded sideways against the dollar between 0.0154 and 0.0156 – a development not unexpected given the currency’s strong seasonal characteristics.
The rupee typically falls in value every second-quarter (April-to-June) due to India’s heightened gold demand heading into the Hindu festival of Akshaya Tritiya. With this in mind, it could be said that the rupee has done well to keep at rates above 0.0154 throughout this period.
The rupee, which has benefitted this year from an improved outlook for emerging markets, attractive yields and amid an environment of general dollar weakness, had strengthened enough to push INR/USD marginally above 0.0156 in late April and mid-May but each time was forced back. This level (equivalent to 64.0 in USD/INR) has a clear history of halting movement in the exchange rate, having done so in 2013, 2014 and several times in 2015, and will act as significant resistance to rupee appreciation in the coming months. A break above this level would likely send the rupee significantly higher and this remains the risk to ABN’s forecast.
Readers can get their hands on Indian rupees at exchange rates far better than those available at the high street bank or airport money changer by using BestExchangeRates’ online comparison calculators for INR travel cash and INR foreign currency transfers.
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