2018 was terrible for the rupee as it lost almost 10 percent and it fell by 2.6 percent in 2019 mainly because of the escalation in the trade war with China that led investors to take interest in the US assets. The Indian rupee has also suffered due to the persistent weakness in the economy that obstructed the recovery despite the rate cuts by the RBI and government’s supportive steps. According to a survey involving about 50 strategists, this trend is not likely to reverse anytime soon. It is expected that the rupee will fall by 1 percent in 2020 with the growing dominance of dollar.
The Indian rupee was one of the three major Asian currencies to fall down so much against the US dollar in 2019. The major reason for this downfall is the global pressure coming from rising crude prices and trade wars. The global crude prices have been rising of late and straining the country’s finances. In 2018, the prices rose to the highest in four years. India spends more to meet its fuel needs most of which are fulfilled through imports. The finances and macro-economy add to the crude price stress to sink the rupee.
The fall of Indian currency is not unique, as other currencies like Argentine Peso and Turkish Lira are also falling continuously. Moreover, the dollar has been continuously strengthening and making the rupee weaker. According to a recent report, international factors like the US-China trade war have more impact on the depreciation of the currency than domestic factors. However, the domestic impact cannot be overlooked. The increasing import bills have widened the account deficit of the country and it is expected to widen more. This has forced foreign investors to pull out of the market, dropping rupee’s value as the dollar’s demand grows with their withdrawal.
The problems responsible for such a fall of the rupee are not expected to go away in 2020 and this will not only affect growth but also the attractiveness of Indian assets. The central bank, concerned about the rise in inflation, keeps the interest rate on hold after cutting rates for five times in 2019. The government is also expected to introduce more fiscal measures in the budget in 2020 that would pressurize the currency even further. However, a part of the strategists predict that rupee can strengthen against the US dollar this year. These predictions include that of Yogesh Kalinge who accurately predicted the value of the currency at the end of 2019. He said that the rupee will remain in a tight range with the dollar with a slight bias. This prediction is based on the expectation that the Federal Reserve would maintain a favourable policy through the current year.
There are predictions that both domestic and international factors would lift the emerging currency in 2020. The cuts made by the RBI in interest rates have led to the lowest repo rate of India in the last ten years and helped lift the rupee which has fallen considerably in the last two years against the dollar and pound sterling. Hopes of a low in the rates, a strengthening stock market fuelled by prospect of higher inflation and tax cuts have helped stabilize the rupee in last few months. A co-relation between the bond yields of the government and the value of the currency says the case will go up. Despite the bad performance of the Indian currency within Asia in 2019, a recovery is expected in this year. The stabilization of bond yields would help deal with risks and the rates are not easy to ignore for investors looking for higher yields. Potential bond and equity inflows could push the rupee stronger in 2020.
The American banking giant Morgan Stanley also predicts a strong performance from the currency in 2020. According to it, the rupee offers great returns for the investors after the adjusted volatility in exchange rates. This is a major concern for traders who borrow low-rate currencies to buy others with higher rates. They earn the difference between these rates. This attractiveness of the currency is boosted by the rate cuts by the Reserve, enhancing the power of Indian assets. It predicts the rate to go down to 68.5 in June 2020 before rising back at the year-end.