2 min read.Updated: 10 May 2021, 07:15 AM ISTBloomberg
The prospect of stricter curbs is reviving memories of last year when similar measures dragged India’s economy into its worst contraction in four decades.
The Indian rupee’s recent gains could be short-lived as pressure grows on Prime Minister Narendra Modi’s administration to announce a nationwide lockdown to curb a deadly wave of coronavirus infections.
The prospect of stricter curbs is reviving memories of last year when similar measures dragged India’s economy into its worst contraction in four decades. It’s also threatening to weaken the rupee, which is among Asia’s top three performers this month, thanks to heavy foreign inflows for initial public offerings, a dovish Federal Reserve and a glut of dollars at state-run banks.
“The recovery in the rupee in recent weeks reflects the softer dollar and weaker import demand as restrictions were imposed," Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. “If a nationwide lockdown were to be implemented, we could see some near-term weakness in the rupee."
A technical gauge is also signaling that the rupee’s advance maybe losing momentum. The dollar-rupee’s slow stochastics, a momentum indicator, shows that the currency pair is in oversold territory. The rupee rose 0.8% last week to 73.51 per dollar.
Goh forecasts the rupee to fall to 76 per dollar in the second quarter but expects further declines to be limited by a reduction in imports.
India’s capital extended its lockdown for another week while the nation reported 403,736 new virus cases on Sunday, and more than 4,000 Covid-19 deaths for a second day. Modi’s political allies, top business leaders and even U.S. President Joe Biden’s chief medical adviser have said lockdowns could be the only way to stem the world’s worst virus outbreak.
Analysts have already trimmed India’s growth forecasts as individual states tightened restrictions, but a nationwide curb could deal a much larger blow to the economy. The Reserve Bank of India stepped in last week to provide loan relief and pledged to inject 500 billion rupees ($6.8 billion) of liquidity to support growth.
Inflation data on Wednesday is expected to provide more economic cues. Consumer prices are forecast to have climbed 4.1% in April from a year earlier, the slowest pace since January, to stay within the RBI’s 2%-6% target range, which would provide room for more support measures. However, signs of more quantitative easing would be bad news for the rupee.