Rupee to rebound but path rife with pitfalls

The Indian rupee will erase some of this year's losses against the dollar over the coming 12 months but high volatility in the run up to general elections in 2019 could send it off-piste, a Reuters poll found.

A selloff in emerging markets and a widening fiscal deficit, exacerbated by rising oil prices - India's biggest import bill - has hurt the rupee this year.

The Indian currency hit an 18-month low of 68.47 per dollar in May and is down over 5 percent so far this year, making it one of the worst performers in Asia.

But the rupee is forecast to rebound and gain slightly to 66.87 in a year from about 67.45 on Tuesday, according to the poll of about 30 foreign exchange analysts taken after the Reserve Bank of India hiked interest rates on June 6.

That median, although slightly weaker than in May, was driven by expectations for Asia's third largest economy to remain the fastest growing major economy as it did in the first three months of 2018 and on predictions for further interest rate hikes from the RBI.

“The INR continues to be alluring with more robust growth and compelling FX reserve backstop,” said Vishnu Varathan, head of economics and strategy for Mizuho Bank in Singapore.

“So once election risks fade and oil price ascendancy is subdued by supply-demand gaps ironing out - mostly via higher US and OPEC supply - we expect the rupee will regain some traction as some of the risk premium - which pressures the currency now - erodes.” The rupee was also expected to get a boost from a weaker dollar outlook.

“We expect the dollar to start weakening around the end of this year or the start of next year. Weaker dollar is expected to support most emerging market currencies,” said Amy Yuan Zhuang, chief Asia analyst at Nordea.

But not everyone was convinced, with the year-ahead forecasts in the widest range in Reuters polls since July 2016, suggesting the rupee's level in the run up to the general elections next year is far from clear.