Rupee's slide from outflows, demonetization likely near end

BENGALURU: The rupee's recent slide from capital outflows as well as a controversial government move to withdraw high-value currency notes from circulation has mostly run its course, a Reuters poll found on Thursday.

The rupee has weakened more than 3 percent in recent weeks to record lows, pressured by a U.S. dollar rally, capital outflows from emerging markets and worries Prime Minister Narendra Modi's currency crackdown would severely dent growth.

The poll of nearly 30 foreign exchange strategists carried out this week showed that the bout of weakness is not likely to intensify much from here. By month-end, the rupee will probably trade around 68.50 to the dollar, near Thursday's 68.41.

In six months, it will reach 69.09 a dollar and fall a little more to 69.20 in a year, the poll showed. While the 12-month consensus represents only a one percent drop from here, each of those milestones would mark a fresh low, if hit.

"There aren't many places out there that can match India's growth rate so I think it is safe to assume that there will be a good amount of capital inflows next year. Therefore a sustained depreciation in the rupee looks unlikely," said Bhupesh Bameta, head of FX research at Edelweiss Financial Services in Mumbai.

India held on to the tag of the world's fastest-growing large economy in the September quarter, expanding 7.3 percent, according to official data released on Wednesday.

But the economy is likely to slow sharply over the coming quarters after the government's move to remove high denomination banknotes from circulation severely hit demand and consumption among the country's 1.2 billion population.

The long queues at banks and ATMs and rationing of available cash has hampered productivity and output and led consumers to curb discretionary spending. A private survey on Thursday showed factory activity had already taken a hit last month.

Still, the latest FX poll showed the vast majority of currency strategists have largely shrugged off any long-term effect on the rupee from the currency crackdown.

About one-third of the total respondents in the survey had a 12-month view that pointed to the rupee gaining slightly from here, while two-thirds of all participants in the poll forecast it will remain above the crucial 70 mark to the dollar.

"Demonetization has only a small role to play. It's going to be a one-two month affair. The bigger picture is where the dollar is headed and how emerging market currencies are going to be affected," Bameta said.

He forecasts the rupee will fall to 70.00 per dollar by end-February, when he says emerging market assets could face selling pressure after U.S. President-elect Donald Trump enters office and introduces fiscal stimulus that could attract investors to the United States, at least in the short term, and boost the greenback.

The dollar has surged almost 4 percent since Nov. 9, after Trump's victory raised expectations his promise of increased infrastructure spending and tax cuts would lead to higher interest rates from the Federal Reserve.

The near-term path for Indian interest rates will also have an important bearing on the rupee, analysts said, especially with inflation easing in recent months and the demonetization drive likely to further dent price growth.

Expectations the Reserve Bank of India - which chopped rates by 175 basis points since January 2015 - would deliver its next cut at its Dec. 7 policy review has gained traction in recent weeks, adding to the weakness in the rupee.