A budget that accelerates fiscal consolidation would give more support to the Indian rupee in the near term, according to a Reuters poll of FX analysts who forecast the currency would erase a fifth of last year's losses over the next 12 months.
A sell-off in emerging markets and a widening fiscal and current account deficit, exacerbated by rising oil prices - India's biggest import bill - pushed the rupee down over 10% last year, its worst annual performance since 2013.
A majority of FX analysts, 11 of 17, said a Feb. 1 budget that focuses on fiscal consolidation would help the Indian rupee the most in the near term. Six chose a growth supportive budget.
"If we do get a budget that at least represents fiscal responsibility and then that responsibility is actually delivered, that could be an environment where the Indian rupee would actually do better than our actual forecasts," Brendan McKenna, international economist and FX strategist at Wells Fargo, said.
A separate Reuters poll of economists expected the government to focus on fiscal consolidation in its budget, the last full one before a 2024 general election, as slowing economic growth would limit it from spending more.
The rupee, which has depreciated every year over the last decade barring 2017, is forecast to rebound and gain about 2% to 81.00 in a year from about 82.56 on Thursday, the Jan. 3-5 poll of over 34 foreign exchange analysts showed.
None of the respondents expected the rupee to be stronger than 75 per dollar, where it started 2022, at any point this year.
"We have moved to a new normal now which would be above 80," said Sakshi Gupta, principal economist at HDFC Bank.
"Even in the worst case scenario, where you see a deep recession in the U.S., the Fed hikes rates to 6%-6.5%, the commodity prices spike up again or there are geopolitical tensions - I think the rupee then moves to above 84-85."
While global commodity prices and the U.S. dollar retreated in the last quarter of 2022, the rupee failed to fully capitalise on the fall. Worsening external balances and concerns over a drop in exports weighed.
"While India's FX buffer should be sufficient to shield the economy against any major external shock, we expect the RBI to become more prudent in H2FY23 while intervening in the FX market, and allow the rupee to move in sync with global trends," said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.
When asked what was the greater risk to their rupee forecasts over the coming year, respondents were nearly split with nine predicting it ends higher than they foresee and seven saying lower.
The fiscal deficit widened to a record 9.3% of gross domestic product in 2020-21 but was expected to decrease to 6.4% this fiscal year, according to the Indian government. Despite the predicted narrowing, it would still likely be one of the widest among its major regional peers.
Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership, said the "fiscal deficit is still too high and needs to be reduced" for the rupee to find some support.
"High fiscal deficit will hurt the savings-investment balance, curb improvement in current account deficit, and complicate the RBI's efforts to temper inflation pressures."
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