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Informist, Monday, Dec. 2, 2024

 

MUMBAI – MUFG Bank forecasts the Indian rupee to fall to 86 a dollar by December 2025 owing to slowing growth in India, with the Jul-Sept GDP growth being much lower than expected, it said in a report Monday. "Part of the driver behind our FX (foreign exchange) forecast change is a less benign domestic growth environment for India, which could weigh further on portfolio inflows," the bank said in the report. 

 

Data released Friday showed India's GDP growth fell sharply to a seven-quarter low of 5.4% in the September quarter due to a slump in the growth of industrial activity. The number was much lower than the consensus estimate of 6.5% and the Reserve Bank of India's projection of 7.0%.

 

MUFG Bank said the RBI's intervention would slow down over time, allowing the rupee to depreciate further. "We nonetheless stress that we are not overly bearish on INR," it added. 

 

However, MUFG Bank expects the rupee to outperform other Asian currencies during the first half of next calendar year even in the situation of high tariffs by US President-elect Donald Trump. The possibility of Indian government bonds being added to the Bloomberg Global Aggregate Index would also attract inflows of around $10-15 billion, although uncertainty about time remains a factor, according to the report. But, the outperformance of the rupee compared to other Asian currencies may not last long and could be reversed as dollar strength moderates in Jul-Dec 2025.

 

The rupee has depreciated by over 1% against the dollar since October because of foreign investment outflows and global dollar strength. The Indian currency fell over 20 paise to settle at a record closing low of 84.69 a dollar on Monday due to the lower-than-expected GDP figures announced on Friday.

 

MUFG Bank has also lowered India's GDP forecast to 6.1% for the financial year 2024-25 (Apr-Mar) and 6.3% for FY26. Earlier, it had projected GDP at 6.9% and 6.7% for FY25 and FY26, respectively. Despite the lower growth projections, the bank anticipates growth to pick up in Oct-Nov on increased government spending and rural demand.

 

The Japan-based bank said improvement in government revenue spending, good kharif and rabi harvests, strong corporate sentiment, and a strong pipeline of private capital expenditure would help the Indian economy to exhibit strong growth in FY25 and FY26. 

 

Meanwhile, the bank expects inflation to remain high, which would allow the RBI to cut rates only from February. MUFG Bank expects the RBI to lower the policy rate by a cumulative 75 basis points. Though the bank does not anticipate a rate cut in the December meeting, it sees the possibility of the RBI taking measures to improve liquidity in the banking system. "As a first move, we think RBI will announce a 50 bps cash reserve ratio cut in its December meeting to help boost banking system liquidity, which has been depleting with the RBI’s aggressive FX (foreign exchange) intervention operations," the report said.

 

For at least two weeks now, the surplus liquidity in the banking system has started declining on account of tax outflows and the RBI's sale of dollars in the foreign exchange market. Liquidity ultimately slipped into deficit on Nov. 25 and remained that way till Thursday. Inflows from the government's month-end spending swung liquidity back into a moderate surplus of INR 496.12 billion Friday. Despite the current surplus, banking system liquidity remains a concern, owing to the upcoming outflows for tax deducted at source and corporate advance tax later this month.  

 

US$1 = INR 84.69

 

Reported by Christina Titus 

Edited by Rajeev Pai

 

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