Will the rupee shed 5% of its value?

India's rupee may hit 20.3 versus the dirham if the government misses its fiscal deficit aim.

The US dollar is overvalued and could see a correction in the middle of next year, while the Indian rupee will remain under pressure in the next 12 to 18 months as the nation's economy slows down and the government faces challenges on the fiscal deficit front, according to analysts.
They believe that the greenback is overvalued around 5 to 10 per cent not because of the strength of the US economy but due to weakness and challenges in Europe, the UK and China.
Analysts noted that the Indian rupee could touch 74.5 against the dollar (20.3 against the UAE dirham) in the next one year or so if New Delhi's surpasses its 3.3 per cent fiscal deficit target.
Kishore Narne, head of commodities and currencies at Motilal Oswal in Mumbai, said in the short-term, the rupee could depreciate to 71.50 and 72 versus the greenback (19.48 to 19.61 against the UAE dirham).
The rupee was trading at 70.95 versus the greenback (19.32 against the dirham) on Sunday, according to XE.com.
"The major worry is that the Indian government announced tax sops and reduced corporate tax but they have not actually come out in public of how they will replenish this funds and meet the deficit," Narne said.
He said the government intends to sell some entities to raise funds, but that will satisfy investors and traders this year only while the tax cut is a perpetual shortage.
"With the backdrop of global slowdown, if the companies don't make money, they don't pay tax. When taxes are cut, governments assume that economy will grow and the tax base will increase. By looking at the global economy, I have doubts whether the Indian economy will really be outsmarting the global economy," Narne told Khaleej Times.
Recently, the Reserve Bank of India cut its economic growth forecast for 2019-20 to 6.1 per cent, a huge downward revision of 80 basis points from its projection made in its August policy meeting.
"So if the fiscal deficit numbers surpass the estimate of 3.3 per cent, then the rupee will depreciate faster next year. So I am looking at the rupee at 74 against the dollar [20.16 against the dirham] and 74.5 versus dollar [20.3 against the dirham] in the next 12-18 months," he said, noting that the Indian rupee has been slightly overvalued in purchasing power parity adjustment.
Anand Shankaran, senior account manager at Shuaa Capital, also sees the rupee at 73 to 74 versus the dollar in the next one year due to a high crude oil import bill.
Is dollar overvalued?
Shankaran said the dollar might depreciate due to geopolitical situation and correct itself.
Amir El Araby, head of trading and analysis at FSG Holding, believes that the US dollar's surge is temporary due to problems in the economies of Europe, the UK and China.
"I think the dollar's strengthening is fake mainly due to conditions in Europe and not related to strength of the US economy. I believe the US dollar is overvalued by 5-10 per cent and could see a correction in the middle of next year. I think the euro will rise and the US dollar-euro parity at 1.18-1.19 is good for both the currencies," El Araby said.
Moreover, he believes that the US Federal Reserve will continue rate cuts, which will negatively affect the dollar.
"Last year, when they were raising rates, the US dollar was rising and now they are cutting rates, it is rising again. That's why I think it is fake rise and is related to bad conditions in Europe and trade war," said El Araby.
He believes sterling will also gain after the Brexit dust settles. "To my understanding, after the Brexit mess is over, sterling will also once again move up. Brexit problems are already priced in so it'll trade around 1.40 and 1.50," he added.
Narne said the US dollar becomes overvalued because the American economy is not as healthy as it looks.
"The currency is always a relative strength. The UK pound has a problem with Brexit, the euro has a problem with growth and the Chinese yuan has a problem with trade war - so they are under stress and naturally the dollar has to be stronger."
He also pointed out that the US dollar gained because other countries devalued their currencies such as China devalued yuan to protect against tariff.
"The problem in Europe is bigger than the US. Similarly, relative to the UK, the US is in a better position. Despite the US economy weakening, the US dollar will not weaken," Narne opined.
Omar Qaryouti, senior vice-president for the Middle East and Africa at ADS Securities, noted that it is difficult to have a long-term outlook for the US dollar but Fed rate cuts will not support the greenback.
- waheedabbas@khaleejtimes.com