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India's rupee to rebound but path rife with pitfalls

June 14, 2018 00:00:00

BENGALURU, June 13 (Reuters): India's rupee will erase some of this year's losses against the dollar over the coming 12 months, according to a Reuters poll.

But the poll found that the rupee's high volatility in the run up to general elections in 2019 could send the Indian currency off-piste.

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 rupee hit an 18-month low of 68.47 per dollar in May and is down over five per cent so far in 2018.

This made rupee one of the worst performers in Asia this year.

But the Indian currency is forecast to rebound and gain slightly to 66.87 in a year from about 67.45 on Tuesday, according to the poll.

The poll of about 30 foreign exchange analysts was taken after the Reserve Bank of India hiked interest rates on June 6.

That median 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.

The median, although slightly weaker than in May, also make predictions for further interest rate hikes from the RBI a high probability.

"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, we expect the rupee will regain some traction," Varathan said.

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," said Amy Yuan Zhuang, chief Asia analyst at Nordea.

"(A) Weaker dollar is expected to support most emerging market currencies," Zhuang said.

But not everyone was convinced.

The year-ahead forecasts in the widest range in Reuters polls since July 2016, suggest rupee's level in the run up to the elections next year is far from clear.

Rising inflation is a well-established risk and any further rapid rise in global crude prices would weigh heavily on the fiscal arithmetic, which is already widening.

In addition, the government is set to increase spending on populist measures ahead of the May general elections, which is likely to make foreign investors nervous.

Over a quarter of nearly 30 respondents in the latest poll expect the rupee to weaken to below the historic low of 68.8985 per dollar.

"Indian rupee will depreciate particularly due to political uncertainties built-up before the general elections next year," according to an economist at Nirmal Bang.

Teresa John, who forecasts the currency to weaken to 70 in a year said: "Anything beyond the 70 mark should really be a cause for alarm."

"If the currency falls below 69.5, there will be heavy RBI intervention," the Nirmal Bang economict added.

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