The Indian rupee could sink to 82.50 against the dollar by March, because of the country’s balance of payments deficit and the greenback’s record-breaking surge.
That forecast and warning aired by IDFC First Bank in a research note on Monday, when the rupee dropped to a record low of 81.5775 as the dollar index raced to its highest level since May 2002.
The dollar’s rally accelerated after the US Federal Reserve raised rates by another 75 basis points last week and forecast more large hikes to control inflation.
“Looking ahead, we believe the dollar strength will endure,” Gaura Sen Gupta, an economist at IDFC First Bank, said.
“Given the strength of the US economy, it’s more likely that the Fed will need to increase interest rates to 4.6% and maintain it for the remainder of 2023.”
Deficit Seen Widening
The Fed rate is currently at 3%-3.25% and officials have forecast it will reach 4.4% by the end of this year.
Alongside dollar strength, an elevated balance of payment (BoP) deficit is has continued to weigh on the rupee.
Sen Gupta pointed out that India’s current account deficit (CAD) is expected to widen to 3.5% of the GDP and possibly to 4% if exports weaken further.
Meanwhile, foreign portfolio flows are also expected to remain volatile, considering high Treasury yields and weak global risk sentiment.
The combination of wider current account deficit and portfolio outflows will result in BoP deficit of $63 billion in the current fiscal year assuming a CAD of 3.5% of GDP, Sen Gupta estimated.
- Reuters with additional editing by Jim Pollard
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