Top forecaster sees Indian rupee’s wild ride coming to an end

The Indian rupee looks set to end its recent volatile phase as surging foreign inflows and a possible hawkish turn by the central bank curb swings, according to Credit Agricole CIB, the currency’s top forecaster.

After turning from being Asia’s best performer in the first quarter to its worst in April when another wave of Covid-19 infections took hold, the rupee is now likely to trade in tight ranges in the coming quarters, said Dariusz Kowalczyk, the bank’s head of Asia research, ex-Japan. He expects the currency to be at 74 per dollar at year-end, versus Wednesday’s close of 74.59.

Rising imports amid a recovery in India’s economic growth and higher commodity prices threaten to return the nation’s current-account to deficit, and may boost demand for the greenback. Yet, higher foreign inflows and the prospect of the Reserve Bank of India moving to control inflation may help control the rupee’s volatility.

“Higher oil prices are definitely a negative for the current account,” said Hong Kong-based Kowalczyk, who had the most accurate rupee estimates in the last quarter in Bloomberg’s rankings. “However, by boosting inflation, they may make the RBI more hawkish, which will support the rupee. Overall, the RBI is likely to intervene to oppose the INR’s strength and smooth its volatility.”

With crude oil prices trading near a three-year high and inflation staying above the central bank’s comfort zone, investors are girding for the RBI to signal some unwinding of its dovish policies at next month’s policy review.

The “current-account deficit has widened again, but foreign direct investments should remain solid,” said Kowalczyk. “Portfolio investments are likely to be positive as well.”