Last year, one of the worst performing currencies in Asia was the Indian rupee and it is forecast to record very little gains in the next few months.
Even a year from now, forecasts show that the Indian rupee would continue trading above the 80 mark against the US dollar.
Even though the Indian economy is the fastest growing major economy, there has been a slowdown in growth. Nonetheless, it is expected to record 6.0% growth in the fiscal year 2023/2024.
However, this strength does not seem to be reflected in the country’s currency. There are underlying economic issues, which include persistent unemployment and dependence on oil, which are holding it back.
Moreover, the Reserve Bank of India (RBI) is also close to putting an end to its rather modest tightening cycle.
It is scheduled for a meeting on Wednesday in which the Indian central bank is expected to deliver its final hike in the tightening cycle of 25 basis points.
This has also put the rupee under significant pressure because the rate gap with the US Federal Reserve has widened.
The US central bank is expected to deliver at least two more interest rate hikes this year by 25 basis points each due to a tighter labor market.
Economists said that the Indian rupee might see some support in the next three months and this would only happen if the Fed signals that they are hitting a pause on their tightening campaign.
But, there is a risk if there is not a big decline in US inflation as markets are hoping to see in the next few months.
If that were to happen, it would push the US Fed to evaluate just how many hikes it needs to deliver. Even if it is slightly higher than what has been priced in, it would result in a dollar rally and put the rupee under pressure.
The rupee’s performance
Last year in October, the Indian rupee had reached a record low of 83.29 per dollar and it recovered by less than 1%.
On Monday, it declined by the most in over four months, as the chances of the Fed to cut rates this year were reduced because of a stronger-than-expected employment report for January.
Most forex analysts believe that the Indian rupee is unlikely to see gains of more than 1% against the US dollar in the next six months and would not go higher than 81.75.
Even though the consensus for 12 months had put the currency at a value of 80.79, which would mean a 2% gain, most analysts no longer expect so.
As a matter of fact, they said that the strongest that the Indian rupee could get in the next six months would be about 2% higher than its current level.
This would mean that it would climb to 81 per dollar. Other forecasts had put the Indian rupee between 79 and 83.