There will be no respite for the battered Indian rupee over the coming year as surging COVID-19 cases amid timid economic recovery and deteriorating external position will pose downside risks.

The Indian rupee was one of Asia’s best performers, having risen 2.3% in May, but lost ground last week, its biggest decline in six weeks. The USD/INR is expected to rise about 2% to INR 74.00 against the U.S. dollar rate over the coming year, up from INR 72.00 seen on Monday.

“Various factors have aligned against the rupee. Not only a steep rise in COVID-19 case numbers, but seasonal weakness and a worsening external position have also come to the fore. Downside risks have risen to our conservative GDP growth forecast of 10% in FY22 (ending March 2022),” noted Daniel Been, head of FX and G3 research at ANZ.

“While a national lockdown has been averted so far, various local lockdowns are in place in many states till early May, with a high possibility of extensions. In addition, the solid set of external data is behind us. The trade deficit has materially risen in the past two to three months on higher oil and gold imports, and the current account registered a small deficit in the December quarter.”

With the resurgence of COVID-19 cases posing the biggest risk to the nascent economic recovery, several economists have downgraded their outlook for Asia’s third largest’s GDP growth for the ongoing fiscal year.

But the recent rise in the country’s imports and a jump in dollar interest rates could hurt the rupee. Additionally, sluggish economic recovery and surge in dollar demand due to a rise in inflation expectations and bond yields could also push the rupee lower.

“Looking forward, we believe the currency outlook is poised to remain
stable with a slight appreciation bias against the US dollar, but risks to this
view remain strongly tilted to the downside,” noted Olivia Alvarez Mendez, FX Market Analyst at Monex Europe.

Last week, the Reserve Bank of India maintained a dovish stance, and governor Shaktikanta Das said that the central bank would keep the view unchanged to revive growth.

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That would keep the Indian rupee weighed down against the mighty dollar at least throughout this year.

This article was originally posted on FX Empire

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