The Indian rupee will struggle to gain any ground in the next 12 months due to uncertainty around elections, the country's external deficit and the impact of a possible tapering in the Federal Reserve's stimulus programme, a Reuters poll showed. The poll also showed analysts expect the Chinese yuan will slowly appreciate over the same time period as the economy improves and on expectations that its central bank will widen the currency's trading band.
The rupee has rebounded a little more than 10 percent since falling to a record low of 68.8 against the dollar at the end of August, boosted by inflows after the Fed refrained from reducing its $85 billion a month bond purchase programme and as the Reserve Bank of India tightened liquidity. But that rally came after a 20 percent plunge since mid-May when rising interest rates in the United States and fears of Fed tapering led investors to dump emerging market assets.
Median expectations from 20 strategists in the poll conducted this week were for rupee to trade at 62 against the dollar at the end of January next year, roughly around its rate on Thursday. It is then seen weakening slightly to 62.50 rupees a dollar by April and 63.0 rupees by October 2014.
Those expectations are much better than what analysts predicted last month. The Fed is now expected to begin cutting its stimulus in March 2014, according to a Reuters poll, but analysts in this survey said the effects of such a move would not be as disastrous for the rupee this time around. "The effect of the taper will hopefully not be as violent as it was but a lot of it has to do with how the taper is communicated and what kind of guidance the Fed brings with the announcement," said Sacha Tihanyi, senior currency strategist at Scotiabank.
"It is possible that the taper is announced but the Fed's guidance is so dovish that it completely takes the edge off the negative impact for a lot of countries, but India will still probably see some pressure on its currency." Compounding India's troubles are upcoming elections and its external deficit.
While elections by May next year increase the uncertainty around reforms and policymaking in the government, analysts said the country's subsidies on oil and energy are unlikely to improve its external deficit. Finance Minister P. Chidambaram last week lowered his current account deficit target to $60 billion for the fiscal year ending March 2014, counting on declining gold imports and double-digit export growth.
Meanwhile, the poll also showed the Chinese yuan will continue to hit record highs, rising slowly to 6.08 in six months and 6.03 by October next year, from around 6.0939 on Thursday. Those predictions are slightly better than last month and signal expectations that the People's Bank of China will gradually widen its trading band as the economy improves.
"We continue to expect a band widening in the current quarter after the Chinese authorities finally allowed USD/CNY to naturally adjust lower after nearly two months of stability," said Derek Halpenny, analyst at BTMU in London. The yuan has been the best performing Asian currency so far this year, gaining 2.3 percent against the dollar. Despite exporters' complaints, Beijing's reformers see a stronger yuan as key to moving China to an economic model focused on producing higher-quality goods for domestic consumption, instead of churning out low-grade exports competing only on price.
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