Fitch Solutions on Monday said it has revised its forecast for the Indian rupee to average stronger at Rs 75.50 to a US dollar in 2021, from Rs 77/USD.
For 2022, it revised the forecast to Rs 77 to a US dollar, from Rs 79 previously, to account for a stronger 2021 forecast.
“We expect the rupee to trade only slightly weaker over the near term from current levels,” it said in a note.
It saw depreciatory pressure on the rupee due to worsening terms of trade from rising oil prices, further monetary easing, and bouts of risk-off sentiment being partially offset by the US dollar weakness and central bank foreign exchange intervention to combat imported inflation.
“Over the longer term, the overvaluation of the rupee in real terms and higher inflation in India vis- -vis the US should exert weakening pressure for the rupee,” it said.
The Indian rupee averaged Rs 74.10 to a US dollar in 2020.
“We expect the rupee to only trade marginally weaker in 2021, and have revised our average forecast to Rs 75.50 to a US dollar, from Rs 77.00/USD to account for the effect of extended US dollar weakness,” Fitch said.
From a technical perspective, the rupee is holding below its resistance level of Rs 72.50 to a dollar as well as trend resistance.
“This suggests that the rupee will likely weaken, similar to 2019, when the rupee displayed such a pattern,” it said.
With India having a crude oil import dependence of more than 80 per cent of its needs, rising global oil prices driven by a global economic recovery in 2021, will see a worsening of the nation’s terms of trade, and put depreciatory pressure on the rupee.
Fitch sees Brent crude oil to average USD 53 per barrel in 2021, versus the 2020 year-to-date average of USD 43.18.
It also expects another 50 basis point cut in benchmark interest rates by the Reserve Bank of India (RBI), which will also exert some downward pressure on the rupee.
“That said, two factors will partially offset the depreciatory pressure on the rupee. First, loose US fiscal and monetary policy will likely continue exerting downside pressure on the US dollar into 2021, which would partially offset rupee weakness.
“Second, the RBI, with a foreign exchange reserve position of USD 578 billion as of December 2020, representing an import cover of around 19 months, will likely intervene to prevent excessive rupee weakness to manage imported inflation to reduce the risk of high inflation derailing India’s recovery in 2021,” according to Fitch.
It forecast inflation to average 4.1 per cent over FY 2022-23 (April 2022 March 2023) and FY2023/24.
“Food and fuel prices tend to heavily impact inflation in India. A poor growing season can easily cause a surge in headline inflation. Rising global fuel prices along with a global demand recovery will also drive up fuel inflation,” it added.