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Rupee to Fall: RBI Reserves Drawdown a Major Worry
7 Jan
Summary
- UBS forecasts Indian rupee to weaken to 92 per U.S. dollar by March.
- Drawdown of RBI's foreign exchange reserves is a key factor limiting rupee recovery.
- Growth concerns and expensive equity valuations pressure India's capital account.
The Indian rupee is projected to weaken significantly, reaching 92 against the U.S. dollar by March, according to UBS Investment Bank. This forecast suggests a depreciation beyond current levels and market expectations, diverging from earlier predictions. A primary concern highlighted by UBS is the ongoing drawdown of the Reserve Bank of India's foreign exchange reserves, which is expected to cap any sustained recovery of the rupee.
While a potential U.S.-India trade deal might offer marginal support, the central bank's necessity to rebuild its foreign exchange reserves is anticipated to exert downward pressure on the rupee. Analysts note that the RBI's large short dollar position in the forward market, though currently easing immediate pressure, creates a future obligation to purchase dollars, impacting the currency later.
Beyond trade dynamics, growth concerns are identified as a more substantial driver of pressure on India's capital account, exacerbated by relatively high equity valuations. Despite robust real GDP growth figures, slower nominal growth has tempered earnings expectations, leading to substantial foreign investor selling of Indian equities recently.
