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Will the rupee reprieve be over soon?

Monday, 23 Sep 2013 | 4:17 AM ET
Prashanth Vishwanathan | Bloomberg | Getty Images

The Indian rupee - one of the world's worst performing currencies this year - has pulled back from record lows in recent weeks, but analysts say a fresh record low of 70 to the dollar is not off the table.

"I'm hesitant to suggest the worst is over for the rupee," said Mitul Kotecha, head of foreign exchange strategy at Credit Agricole.

"Eventually this near-term consolidation will give way to a resumption of downward pressure," he said, adding that he forecasts the rupee to breach the 70 to the dollar level in the first quarter of next year.

(Read more: India's August trade deficit shrinks as exports rise)

"In the first quarter [of 2014] there will be uncertainty around the elections in India, tapering will also be likely to have taken effect and then there'll be concerns about capital flows," he added.

The rupee saw a sharp selloff this year after the Federal Reserve first started talk of tapering in late May, sending it spiraling to a record low of 68.8 to the dollar on August 28. In the weeks since, India's domestic currency recovered some of its losses as tapering fears abated and investors anticipated rupee-boosting measures from new Reserve Bank of India governor Raghuram Rajan.

(Read more: Foreign investors ignore panic gripping India)

Taper delay is a lucky break for India
Independent economist Andy Xie and Jahangir Aziz, Chief India Economist, JP Morgan tell CNBC's Cash Flow what India needs to do to reform its economy.

However, at his first meeting on Friday, Rajan surprised markets with his 25 basis-point hike in the benchmark lending rate to 7.5 percent (hyperlink: 101049605) together with a scaling back of earlier measures meant to support the currency, which prompted a slight dip in the rupee's value of around 0.4 percent.

Macquarie bank's head of fixed income and currencies, Nizim Idris, said he was pleasantly surprised by the action taken by the Reserve Bank of India, but said ultimately monetary policy moves would not be enough to curb weakness in the currency anyway.

"I don't think monetary policy is the burden of the currency at the moment. We have a target of 70 to the dollar, but a lot of that depends on the [structural] reform, which is a long-term thing, and also Fed tapering," he said.

Idris added that the Fed's decision last week not to taper would give the rupee some short-term "breathing space," but policy makers would need to use the time wisely.

(Read more: India's crisis a 'wake-up call': Stephen Roach)

"If [Indian policy makers] were to take [the decision not to taper] as an opportunity to push forward reforms then that's good. But if they don't, then tapering will eventually come... and if the situation hasn't changed in India, then the rupee could go back to 70 [to the dollar]," he added.

Other analysts, however, were less convinced that a rupee at 70 to the dollar was on the cards.

"The initial panic is over. I think the speculators who ran riot with the currency over the last few months have looked to take the profits off the table," said Sajiv Dhawan, managing director of JV Capital Services.

"That's not to say we can't slip back to 63 or 65 sort of levels if some nervousness creeps in. But to see a level of 70 would require another major crisis of confidence here and maybe a sovereign downgrade and that looks unlikely at the moment," he added.

(Read more: RBI's Rajan takes a deep dive to save the rupee)

—By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

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