- India’s rupee has fallen to an all-time low against the US dollar.
- The currency has already slipped by 10% this year against the USD, but ANZ says there could be more falls to come.
- It adds to lingering concerns about emerging market currencies, with investors on edge about possible contagion risk.
Lingering doubts around emerging markets (EM) are keeping investors on edge in the second half of the year.
The MSCI emerging markets currency index just had its biggest one-day fall since August. Many EM currencies are at or near all-time lows against the USD, which has given rise to contagion fears.
One such currency is the Indian rupee — notable given the World Economic Forum lists India’s economy as the seventh largest in the world.
After further falls this week, one US dollar now buys more than 71 rupees — a new all-time low for India’s currency.
Although it’s already lost more than 10% this year against the greenback, ANZ analysts said the rupee is likely to face more downside pressure in the months ahead.
“With the INR having reached our year-end forecast of 71.5, the question is how much lower it can go,” strategists Khoon Goh and Rini Sen said.
Their modelling puts the current fair value of the rupee at around 73 per US dollar — a discount of around 2% from current levels.
The pair cited an increasing current account deficit, declined foreign capital inflows and reduced levels of intervention from India’s central bank as the primary catalysts.
“India’s July trade balance worsened to $US18 billion, led by surging oil imports,” the pair said. At the same time, higher GDP growth is helped to boost non-oil imports.
“As a result, we expect the current account deficit to deteriorate to 2.6% of GDP in FY19 (ending March 2019) from 1.5% of GDP in FY18.”
They also noted a shift in behaviour from the Reserve Bank of India (RBI).
Earlier in the year, the RBI was active in selling US dollars from its foreign currency reserves in order to prop up the currency.
“Official data for July and August has not been released, but our estimates suggest that the pace of intervention was substantially reduced in those two months, even amid contagion fears from the Turkish crisis,” the analysts said.
They added that the RBI could intervene if it wanted to, because India’s foreign currency reserves are more than adequate.
But the reason it doesn’t is because India’s economy is already facing a liquidity squeeze, and selling more USD reserves would only add to the problem.
“For this reason, we expect the RBI to remain cautious in its intervention policy going forward, with the implication being further volatility in the currency,” they said.
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