What's Bothering the Indian Rupee and where does it go from here?

Image © Kriangkrai, Adobe Stock

- Indian Rupee worst performing Asian currency of 2018

- RBI apparently comfortable with depreciation for now

- Commerzbank forecasting further underperformance

The Indian Rupee's underperformance remains a highlight of the current foreign exchange market with the currency failing to take advantage of a broad-based decline in the US Dollar to the same extent as its peers.

KRW, THB, CNY, SGD, and TWD are up on average by 1.3% vs. USD since 13 August, PHP, MYR and IDR are still down by 0.3% but INR is down by nearly 1%.

The Rupee trades at a 10% loss against the US Dollar for the 2018 year and a 5% loss against Pound Sterling.

"There is seemingly no respite for the battered Indian rupee as it holds onto the dubious title of the worst performing Asian currency this year," says Antje Praefcke, an analyst with Germany's Commerzbank.

Praefcke notes the macro fundamentals are supposed to be good, so it begs the question of what’s causing INR’s underperformance?

An exodus of investor capital from emerging markets brought about by a strengthening US Dollar which has far-reaching negative implications for developing world economies is seen as the main driver behind the Rupees decline.

Praefcke notes three factors:

1) The usual suspect of firmer oil prices, NYMEX crude oil prices are 7% higher from the low in mid-August;

2) notable seasonal month-end USD demand from oil importers; and

3) the perception that RBI is tolerating a weaker INR and not intervening as much.

"This was highlighted by the weekly change in FX reserves which was stable for week-ending 17-August but fell on average by USD1.7bn in the first two weeks of August," notes Praefcke regarding point 3.

So where does the Rupee go from here?

"A new month and a firm Q2 GDP due on Friday could bring some respite. However, if RBI is playing it cool and preserving its ammunition for seemingly a bigger fight in 2019, we could see USD/INR remain above the 69-70 level near term," says Praefcke.

However, we hear from analysts at Skandinaviska Enskilda Banken (SEB) that the Rupee might have bottomed out at historic lows against the US Dollar and is on course to stage a modest recovery from hereon.

The Scandanavian lender says India's Rupee can resist further depreciation during the months ahead thanks to higher interest rates and a robust outlook for economic growth which, for investors, will compensate for a deteriorating trade balance and elevated inflation risks stemming from higher oil prices.

For a long time, India benefited from a downward trend in energy prices, when now that oil prices have climbed again, the economy is under pressure on several fronts. The country’s trade deficit has widened and the government has cut fuel taxes in order to ease the impact on the private sector," says Andreas Johnson, a currency strategist at SEB. "With future oil prices expected to be around USD 70-80/barrel, however, the negative impact on the government budget and economic growth will be limited."

Johnson and the SEB team also predict more policy action from the Reserve Bank of India during the months ahead, which could offer further support to the Rupee.

SEB forecasts the USD/INR rate will fall to 70.0 before the end of 2018 and that it will then decline back to 68.5 in 2019 and to 68.0 in 2020. However, the bank predicts the Pound-to-Rupee rate will rise further over coming quarters, to 92.95 for December 2018, to 100.68 in time for 2019 and to 108.84.

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