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Note ban, Trump’s election to hit rupee hard in coming year: Reuters poll

business Updated: Jan 06, 2017 18:08 IST

An Indian bank employee checks stacks of new 2000 rupee notes in Ahmedabad on November 11, 2016. Long queues formed outside banks in India as people crowded in to deposit old currency and withdraw new notes after the two largest denomination rupee notes were taken out of circulation. / AFP PHOTO / SAM PANTHAKY(AFP file photo)

By Krishna Eluri

BENGALURU (Reuters) - The rupee is expected to fall further against the U.S. dollar this year to a record low, hit by rising global bond yields and an economic blow from New Delhi’s dramatic currency crackdown launched two months ago, a Reuters poll found.

The rupee performed a bit better than most of its regional peers in 2016, weakening just over 2% as India’s economy, the fastest-growing in Asia, roared ahead for most of the year.

But capital outflows intensified toward the end of 2016 after Donald Trump won the US presidential election and Prime Minister Narendra Modi announced the end of high-value bank notes.

The rupee is forecast to weaken to 68.50 a dollar in one month versus 67.73 at Thursday’s close, the poll of nearly 30 foreign exchange strategists carried out this week showed.

It is expected to fall further to 69.50 by year-end. That 12-month consensus is the weakest for several years and would mark a record low. Just three months back the view in a Reuters poll was for the rupee to trade at 67.73 in a year.

“We see a less rosy scenario in the capital account and current account front in the coming two years, with global bond yields and money flowing back to the US,” said Bhupesh Bameta, head of FX research at Edelweiss Financial Services in Mumbai.

Since Trump’s election victory, markets have realigned over expectations his administration will bring in sweeping tax cuts, infrastructure projects and deregulation.

The 10-year US treasury yield has rallied more than 25% since the election, hitting a two-year high of 2.641% on December 15.

The Fed also raised the federal funds rate last month for the first time in a year. The central bank signalled a faster pace of rate increases this year based on expectations for fiscal stimulus.

In India, Modi’s demonetisation drive has hampered both industrial and services output, with a private survey this week showing factory activity and services took a hit last month, lending credence to worries that it would dent growth.

“Given the demonetization exercise, the attraction for gold may come back again,” Bameta said. “(Given) the fact that there was no meaningful depreciation of the rupee over the last two years when everything else was depreciating, a due.”