The Indian rupee could weaken further this year as oil imports remain costly and doubts persist about the new government's economic reform agenda. But economists expect the rupee to recover in early 2005.
The currency, which has already slid 1.6 percent so far in 2004 to 46.31 per dollar, may end the year down as much as 3 percent, at about 47 per dollar, analysts said.
Once oil prices stabilise, the rupee should claw back as India's increasing economic might draws foreign investment and exports grow. "The pressure on the rupee should persist for another 6-8 months, oil being a key reason," said Dhananjay Sinha, economist with ICICI Bank in Bombay.
"But the Indian growth story is a positive one, and capital inflows will eventually pick up," he said.
The rupee has lost 6 percent since early April after gaining 13 percent in the preceding two years on the dollar's fall and strong foreign investments, drawn by a thriving economy and high interest rates.
A change of government in May, rising US interest rates and spiralling oil prices have combined to pull the rupee down.
India is a key oil consumer and its oil import bill could jump 50 percent to $27 billion in the year to March 2005.
Foreign funds have also stepped back, waiting to see how far the new government pushes with economic reforms.
They have sold nearly $600 million worth of Indian shares and bonds since early May, after buying assets worth $4.2 billion in the first four months of the year.
Communists who back the government have opposed plans to allow foreign companies higher stakes in the high-potential telecommunications, insurance and aviation sectors.
"We are vulnerable to a decline in global risk appetite - a factor which is hurting currencies of all emerging markets," said Singapore-based investment consultant Anantha Nageswaran, who expects the rupee to trade at 47 per dollar by the year-end, a level last seen in June 2003.