Moneycontrol Bureau
Continuing its downward spiral, the rupee could weaken to the levels of 63-64 against the dollar by end of March 2015, says brokerage house Emkay Global.
Emkay's latest assessment of emerging market currencies, which historically tend to follow the movement in developed markets, highlights conspicuous misalignment against the backdrop of generalized dollar strengthening -- a situation that can induce renewed volatility in emerging markets.
According to Emkay note, this volatility will have repercussion for the rupee along with domestic factors, which could also provide some headwinds.
"Overall, strengthening dollar index, weaker-than-expected domestic growth and latent depreciation bias would help rupee to weaken further," the note says.
The currency had plunged to a nine-month low of 62.25 against the dollar intra-day Thursday before recovering marginally by 2 paise to close at Rs 61.94 on suspected selling of the US currency by state-run banks on behalf of the RBI and mild recovery in market.
According to forex dealers, besides increased selling of the American currency by exporters and banks, the dollar's weakness against rivals overseas supported the rupee. The currency strengthened by 8 paise to 61.86 against the dollar in early trade Friday.
Major developed market currencies -- euro, GBP and Japanese yen -- have weakened substantially against the dollar, however most of the emerging market currencies have been resilient in the past few months. This divergence is also clearly apparent from trade-weighted dollar indices.
While the dollar index (in real terms) against major currencies has strengthened around 6 percent in the past 3 months, USD broad index (including EM currencies) has strengthened only around 3 percent. In fact, the divergence is the starkest in the past four decades, says the Emkay note.
Besides global spillovers, the brokerage house also sees certain domestic factors that could further the rupee weakening. It expects economic growth close to 5 percent in FY15 as it sees positive contribution to GDP growth from artificial suppression of CAD (restricting gold imports) wearing off in the coming quarters. Moreover, it does not see much change in ground reality despite general expectation of revival in investment cycle.
From a longer-term perspective, Emkay feels that there is still sufficient latent depreciation bias embedded in rupee due to high inflation differential with major trading partners. Also, it believes that recent moderation in inflation will be insufficient to neutralise the backlog of high price differential.
Posted by Kankana Roy Choudhury
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