Indian rupee to trade weaker in 2021: Fitch

Fitch Solutions sees pressure on INR from rising oil prices, monetary easing

An India Rupee note is seen in this illustration photo June 1, 2017.

An India Rupee note is seen in this illustration photo June 1, 2017.

REUTERS/Thomas White

Fitch Solutions expects the Indian rupee (INR) to trade slightly weaker over the near term from current levels, revising its previous forecasts.

“We expect the rupee to only trade marginally weaker in 2021, and have revised our average forecast to INR75.50/USD, from INR77.00/USD to account for the effect of extended US dollar weakness,” it said in a report released Monday.

On Monday, the Indian rupee opened at 72.93 against the US dollar, up 19 paise from the previous close of 73.12, amidst a weak dollar and firm domestic equities.

Fitch said it expects depreciatory pressure on the rupee from a worsening terms of trade as a result of rising global oil prices as India depends on crude oil imports for more than 80 percent of its needs.  The research firm has forecast Brent Oil to average $53.00/bbl in 2021, versus the 2020 year-to-date average of $43.18/bbl. 

“We also expect another 50bps worth of cuts to the RBI’s (Reserve Bank of India) policy repurchase rate, which currently stand at 4.00 percent, in 2021 and this will also exert some downward pressure on the rupee,” the report noted.

Meanwhile, positive news on COVID-19 vaccines as well as US President-elect Joe Biden’s victory have improved risk sentiment and equities rose to new highs in many markets.

“Considering still-elevated uncertainty around the recovery outlook given a resurgence in COVID-19 infections in major economies in Europe, Asia, and record infection counts in the US, markets may have overpriced positive news recently so the risk of correction lingers over the coming months. Given the rupee’s status as an emerging market currency positively correlated to risk, the rupee is likely to weaken during such risk-off period.”

Over the longer term, the over-valuation of the rupee in real terms and higher inflation in India vis-à-vis the US should exert weakening pressure for the rupee, Fitch said.

(Reporting by Brinda Darasha; editing by Seban Scaria)

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