The Indian rupee, one of the worst-performing Asian currencies last year, is forecast to strengthen very little in coming months and still trade above the 80 per dollar mark a year from now, a Reuters poll of foreign exchange strategists found.
Although India is the fastest-growing major economy, with growth slowing but still expected at 6.0% in fiscal 2023/24, that relative strength is not reflected in the currency. Underlying economic problems, including a reliance on imported oil and persistent unemployment, continue to hold it back.
The Reserve Bank of India is also near the end of a modest campaign to increase interest rates, and is due to deliver a final 25 basis point rise, to 6.50%, on Wednesday.
That is also putting pressure on the rupee through a widening interest rate gap as the U.S. Federal Reserve, managing rate policy in a much stronger labour market, is forecast to deliver at least two more quarter-point rises by mid-year.
"Over the next three months, you could start seeing some support for the rupee come back again and the reason for that could be the Fed finally signals that it is going to pause," said Sakshi Gupta, principal India economist at HDFC Bank.
The risk, however, is if U.S. inflation does not fall as much as markets are hoping it does in coming months.
"This could nudge the Fed to reprice how many rate hikes it needs to deliver. Even if it's marginally higher than what the market is currently expecting ... that could lead to a brief dollar rally and pressure the rupee."
After recovering less than 1% from a record low of 83.29/$ in October last year, the rupee fell by the most in more than four months on Monday, as an upbeat January U.S. jobs report made an interest rate cut from the Fed later this year even less likely.
The latest Reuters poll of 43 foreign exchange analysts, taken after the Feb. 1 budget, showed the rupee strengthening just over 1% to 81.75 per dollar in the next six months.
While the 12-month consensus was for it to gain more than 2% to 80.79 per dollar, no survey respondent expected the currency to trade where it was in January last year, at 73-74 per dollar, with the most optimistic call at 79.00.
The median view from 16 analysts who answered a separate question said the strongest the rupee would get over the next six months was roughly 2% above the current level, to 81.00/$. Forecasts were in a 79.00 to 83.00/$ range.