The currency is poised for more losses as a resurgence in Covid cases to a record high threatens the economy
The Indian rupee has turned into Asia’s worst-performing currency from being the best in the previous quarter. It’s poised for more losses as resurgence in Covid cases to a record high threatens to disrupt the economy.
The rupee weakened past 75 per dollar for the first time in eight months this week. Federal Bank Ltd. expects it to decline further to 76 by year-end. The currency’s decline may be exacerbated by unwinding of short dollar positions against the rupee, which ICICI Bank Ltd. estimates has grown to $50 billion.
The currency mayhem is playing out as India overtakes Brazil as the second-worst-hit Covid nation in the world. Stricter restrictions on movement across the country are reviving memories of last year when extended lockdowns squeezed demand and pushed the economy into its worst contraction in nearly seven decades.
Economic growth is going to get more impacted than what we are expecting, said V Lakshmanan, head of treasury at Federal Bank Ltd. in Mumbai. We are underplaying the impact of Covid.
The rupee slumped 2.6% against the dollar so far in April after dropping 0.1% in the quarter ended March. It fared better than other Asian currencies in withstanding rising U.S. yields in the last three months thanks to a rare current-account surplus, economic recovery and heavy foreign inflows.
Traders are concerned that the rupee’s tailwinds could start fading. Rising commodity prices may push the current-account into a deficit in the fiscal year that started in April, while the central bank’s quantitative easing announced last week is seen adding to the liquidity glut, worsening the rupee’s woes.
However, Barclays Plc expects the Reserve Bank of India to defend the rupee using its massive foreign reserves.
The RBI will likely sell USD into this bid as this move is relatively outsized, said Ashish Agrawal, head of FX and emerging markets macro strategy research. He expects the rupee to climb to 73 per dollar by year-end and sees the latest bout of weakness as a catchup to losses suffered by other emerging market currencies in March.