Mumbai: The rupee will continue slipping against the dollar this year as turbulence in the global credit markets reduces demand for risky assets, and political uncertainty weighs on sentiment, JP Morgan said in a recent note.
Large capital inflows, that helped the rupee hit a nine-year peak of 40.20 per dollar in July, were tapering off, partly due to tighter restrictions on the amount of money Indian companies could raise overseas and repatriate, it said.
A potentially destabilizing stalemate between the government and its communist allies over a controversial nuclear deal with the United States had sparked investor concern, and would likely result in paring of positions in the local currency, noted the New York-based investment bank.
“The rupee is no longer seen as a one-way bet. This is a significant development, in our opinion, as it is likely to result in a gradual readjustment of real sector currency leads and lags,” it said.
The rupee was trading at 40.96/97 against the dollar in afternoon trade on Monday.
Easing capital inflows would also have an adverse impact on the current account deficit, already widening from slowing export growth and strong imports, which would fuel investor concern about the rupee, it noted.
With the rupee expected to slip, exporters were unlikely to hedge their receivables against rupee appreciation, which may further contribute to the local currency’s weakeness.
“We believe the rupee is likely to weaken over the next few months, driven by a sharply lower BoP (balance of payments) surplus, reduced hedging by exporters, limited appetite for risker assets and the uncertain political backdrop,” said JPMorgan, which expects the rupee to fall to 42 by end-2007.