US fiscal deficit, RBI stance may help rupee

MUMBAI: While the rupee is expected to remain under pressure in the near term due to the rise in global crude oil prices and a spike in the US 10-year bond yields, experts believe that the worsening fiscal deficit situation in US and a likely shift in monetary policy stance by the Reserve Bank of India (RBI) could help the local currency recover some of its lost ground in the medium term.

The Indian currency closed at 66.75 per dollar on Friday after slipping to its 14-month low during the previous trading sessions.  “With US 10-year yield hovering around 3 per cent, and US Dollar Index at 91.56 level compared to calendar year low of 88.39, the rupee is likely to remain under pressure in the near term with a possibility of it touching 68 level mark if the US yields jump higher from the current levels and oilprices sustain,” said Elara Capital.

However in the medium term, it added that the worsening fiscal deficit situation in the United States on account of tax cuts and US President Donald Trump’s preference for weaker US Dollar would somewhat support the emerging market (EM) asset basket including the Indian rupee towards second half of FY19.

The financial service firm also pointed out that an expected shift in policy stance by RBI and an increase in interest rate during the second half of this fiscal year would reduce the interest rate differential with the US, which would incrementally support the rupee.

“We believe the rupee would begin to find some support from Q2FY19 leading to some appreciation in the currency from the current levels. However, the improvement would not be enough to cover the lost ground and hence we are revising our expectation of the rupee downward to an average of 65.5–66 a dollar in FY19 from our previous expectation of 64 a dollar,” it added.