Further weakness ahead for the rupee

The rupee has fallen by around 4% so far this month, underperforming all other major currencies in Asia. Growing risk aversion amongst investors in recent weeks has resulted in broad losses in EM currencies, but the rupee has been further impacted by escalating tensions in Kashmir and a slightly larger-than-expected rate cut from the RBI. (See Chart 1.) Looking ahead, we are forecasting a further drop in the rupee. For a start, we think that India’s central bank will loosen policy yet again at the next MPC meeting in October. If we are right, then expectations of further monetary easing are likely to build over the coming months and the rupee will weaken in turn. The effect would be compounded if investors think that aggressive policy loosening will lead to higher inflation in the future. What’s more, we think that a further slowdown in the US will cause the S&P 500 to slump and investors to retreat from risky assets generally. All told, we expect the rupee to fall to 73/$ by the end of 2019, and 75/$ by the end of 2020.