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Economy: Forex outlook | Volatility abound
Publish date: July 11, 2018
The Indian rupee is in choppy waters due to global volatility and domestic vulnerabilities. The global trade war, geopolitical uncertainties, rising crude prices are some of the international factors that have bruised the Indian currency. On the domestic front, the capital markets have seen a 18-month high FPI outflow, while the economy seems to be hurtling towards potential twin deficit and inflation headwinds.
Key Highlights
- Emerging market (EM) currencies have been hit hard due to a raft of global volatility in the shape of a) trade wars devolving into currency wars b) steady rise in global crude prices c) policy battles between various central banks around the world and d) at least two Fed rate hikes by CY2019. Such tumult has resulted in EM currencies’ worst performance since CY2015.
- We believe India’s current account deficit (CAD) will fall sharply from 1.9% in FY2018 to 2.9% in FY2019.
- There may be a semblance of stability for the Indian rupee because it has moved to the slightly overvalued zone, based on the Real Effective Exchange Rate (REER). REER is the value of a currency by weighting it against a few major global currencies.
Valuation & outlook
We expect the US$-INR to range between 67.5 and 71. However, the pressure on the Indian currency will remain unabated due to continuing uncertainties at home and overseas. We will continue to maintain our depreciation bias till the second half of FY2019.
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