The Indian rupee has been remarkably resilient, in spite of a solid unwinding in growth and a deteriorating fiscal position, noted ANZ in a research report. This has been linked to three drivers: Firstly, the balance of payments is rebounding throughout all components, permitting the basic balance to return to surplus staring third quarter 2019; secondly, inflation has been benign, with core rate falling; and lastly dovish monetary policy has underpinned the currency.
These factors are likely to keep cushioning rupee weakness in 2020, albeit less strongly than currently. The improvements in BoP are mainly because of a widening output gap squeezing imports, but that is likely to turn as growth momentum rebounds in 2020. Inflation, at present, driven by food prices, is inching above the mid-point of the RBI’s target range of 2 percent to 6 percent. Meanwhile, a final RBI cut is expected in February.
“Also, we expect growth improvements to filter through gradually, with GDP remaining at around 6% in FY21 (April 2020–March 2021). We therefore, continue to expect the rupee to make modest progress towards fair value next year, ending 2020 at 72.50”, added ANZ.
