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Informist, Tuesday, Dec. 3, 2024

By Pratiksha

NEW DELHI – After depreciating 0.5% against the dollar last month, the rupee is likely to remain weak in December due to sustained foreign portfolio outflows from domestic markets and a strengthening dollar index. However, the Reserve Bank of India is expected to continue its intervention through dollar sales in a bid to support the currency. 

According to a median forecast of 16 respondents from banks, corporates, and brokerage firms polled by Informist, the Indian currency is expected to end the month at 84.73 a dollar, against November's close of 84.4825 a dollar.

Foreign portfolio investors have pulled out almost $13 billion worth of funds from domestic markets since October amid rising geopolitical tensions due to the West Asia conflict, and risk-off sentiment after Donald Trump got re-elected as the US President. Market participants expect this trend to continue this month as well, especially after data recently showed that India's GDP growth was sharply below expectations in Jul-Sept. GDP growth slumped to a seven-quarter low of 5.4% in the quarter ended September.

"FPI outflows have been continuing. Trump's re-election and his policies are pointing to higher growth and inflation," said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank. "I expect these FPI outflows to continue, at least till the first two weeks of January."

The Indian currency will also continue to face the heat from a globally strengthening dollar index amid uncertainty over the Federal Reserve's rate cut cycle, according to poll respondents. The dollar index, which measures the strength of the greenback against six major currencies, surged almost 1.8% last month. 

Market players are still split on the likely outcome of the Federal Open Market Committee's December meeting, due on Dec. 18. Traders currently price in a 72.5% probability of the Fed cutting rates by 25 basis points this month and a 27.5% chance of the central bank maintaining the status quo, according to the latest CME FedWatch Tool.

Moreover, Trump's proposed policies may keep the demand for the US unit bolstered globally, according to market players. A case in point - the US president-elect on Sunday threatened 100% tariffs on exports from BRICS nations to the US if these countries attempt to replace the dollar as the trading currency. This prompted investors to flock to the safe-haven US unit.

Bets against the rupee are piling up as the Chinese yuan has also been under pressure due to Trump's proposed tariff policies. The yuan weakened 1.8% against the dollar in November, driven by fears of an intensifying US-China trade dispute.

As dark clouds loom large, market participants are counting on the central bank to protect the Indian currency from sharp depreciation. However, most market participants do not expect the RBI's theme of aggressive intervention, which earlier prevented even modest fluctuations in the exchange rate, to continue going ahead. 

"It (RBI's intervention) will continue, but the RBI may have to be more judicious in burning reserves to defend any level, especially when global headwinds do not seem to have a fixed expiry date right now. A continued active use of NDF intervention is also expected," said Dhiraj Nim, a currency strategist at ANZ Bank. 

Currency traders flagged that the central bank's ability to sell dollars may come down as it has used up a significant portion of its foreign exchange reserves in the last two months. India's foreign exchange reserves fell to a near five-month low of $656.58 billion in the week ended Nov. 22. The reserves have now declined by over $48 billion from the record high of $704.89 billion hit late September. 

The RBI's highest ever net outstanding short positions of $49.18 billion in dollar/rupee forward contracts at the end of October may also deter the central bank from going all guns blazing in its attempt to prevent a sharp depreciation in the rupee, they pointed out. Of the 16 poll respondents, six expect the rupee to test the psychologically-crucial 85-per-dollar mark before the new calendar year. 

While the central bank may indeed provide some cushion to the Indian currency, given the persistent nature of the factors expected to weigh on the local unit, it may only be able to do so much.

POLL DETAILS

End

US$1 = INR 84.69

Edited by Tanima Banerjee

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