Rupee: For Asia’s only losing EM currency, the future looks even bleaker

The rupee is the only emerging Asian currency to weaken this quarter and its losses may gather pace as a report this week is forecast to show economic growth slid to a six-year low.

The rupee, which has slumped almost 5 per cent from this year’s high in July, is also under selling pressure due to escalating levels of public debt and a credit crunch among non-bank finance companies, known as shadow banks. Moody’s Investors Service cut the country’s credit rating outlook to negative this month, saying the economic slowdown was deeper and longer than it anticipated.

“The biggest risk emerging for India at this juncture is growth weakness,” said Indranil Pan, chief economist at IDFC First Bank Ltd. in Mumbai. “That, along with fiscal risks, will probably cause the rupee to weaken. The poor growth conditions may lead to lower capital flows and hence could be a significant negative for the currency.”

India’s gross domestic product probably slowed to 4.6 per cent last quarter, which would be the least since the first three months of 2013, according to the median estimate in a Bloomberg survey before the data is released Friday. State Bank of India, the country’s largest lender, predicts growth will slide to 4.2 per cent, a record low in data starting in 2012.

The rupee dropped to 72.2425 per dollar earlier this month, a whisker away from a nine-month low of 72.4075 set in September. A breach of support around those levels may see it weaken toward 73.0217, the 76.4 per cent retracement of its rally from October 2018 to July 2019, according to Fibonacci analysis. It closed at 71.715 on Friday.

The Reserve Bank of India has added to the rupee’s downdraft by cutting its benchmark repurchase rate by a combined 135 basis points starting in February. That has pushed down bond yields and sapped foreign demand for the nation’s debt.

At the same time, the RBI has boosted dollar purchases to increase rupee liquidity in the financial system, as shown by foreign-exchange reserves climbing to a record $448 billion.

A more pronounced growth slowdown than other regional emerging markets and one of the most aggressive rate-cutting cycles in Asia “has resulted in a major headwind for the rupee,” said Peter Chia, a strategist at United Overseas Bank Ltd. in Singapore. “The RBI’s rate cuts, almost twice the amount delivered by the Fed, have eroded the interest-rate advantage the rupee has over the dollar, denting its attractiveness as a high yielder.”