Home/ Home-page / Rupee may weaken in 2018 after stellar performance this year

Mumbai: The Indian rupee is set to end 2017 on a higher note, reversing six consecutive years of fall. But going into 2018, the course of the rupee could alter mainly due to the country’s weakening macroeconomic factors, according to currency dealers.

So far this year, the rupee has gained 6%.

“As we head into 2018, we expect the strength in rupee to continue; although the extent of appreciation could be less as we expect marginally deteriorating macro narrative in 2018. We expect US dollar-Indian rupee to trade in the range of 62-65 with appreciating bias largely in 1HCY18 (first half of 2018)," said Sajal Gupta, head forex and rates, Edelweiss Securities Ltd in a report.

“The key risk to our appreciating bias in 1HCY18 emanates from any deviation in the fiscal consolidation roadmap which looks likely on account of general elections in 2019," it added.

On Friday, rupee opened at 64.07 a dollar.

The rupee is likely to appreciate against the dollar in January because of seasonal factors such as return of inflows into local markets after the year-end break.

However, according to Harihar Krishnamoorthy, treasurer at FirstRand Bank, while there is the seasonal appreciating bias in January as flows resumed, any upside will be offset by importers who would want to cover their positions.

“On the global front, the US tax bill is expected to keep the dollar index weak. But a sharp spike in crude prices or dramatic change in flow on either side, may lead to rupee breaking from the range-bound movement," he said, adding that until the Union Budget, the rupee is seen in the range of 64-65 to a dollar.

According to sector experts, while growth has recovered, other indicators such as current account deficit (CAD), inflation and fiscal position has started to deteriorate.

ICICI Bank Global Markets forecasts higher CAD of 1.7% of the GDP in fiscal 2018 as against 0.7% a year ago amid sharp growth in imports.

“Any further pickup in crude prices has the potential to further worsen not only CAD but also inflation and fiscal position. Also, the expectation of a populist budget in FY 2019 has increased recently, which might also deter sentiment. In this context, we expect INR to trade with a gradual depreciation bias. Overall we expect INR to trade in the range of 64-66 with the March end level of 65 in FY2019," it said.

A large part of rupee’s appreciation in 2017 was supported by strong foreign inflows into domestic financial markets.

While improving growth prospects bode well for inflows into the equity market, recovery in earnings growth is equally essential for sustenance of flows, according to currency dealers.

On the debt side, rising bond yield may attract foreign flows. However, limited space to purchase securities for foreign portfolio investors (FPIs), as the current quota is nearly exhausted for government as well corporate securities, may limit incremental inflows.

Additional limits worth Rs6,400 crore for investment in government bonds will be available for FPIs from Monday, the Reserve Bank of India notified on 12 December.

So far this year, the rupee has gained 6%, while foreign institutional investors have bought $7.73 billion and $23 billion in equity and debt, respectively.

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Updated: 29 Dec 2017, 11:36 PM IST
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