Currency trends for the Indian Rupee in 2021

January 5, 2021

In 2020, The Indian rupee now trades at around 73.9, having spent most of the year in a trading range of 72.15-74.35 against the US dollar. Compared to the fortunes of other emerging market currencies, i.e. Brazilian Real, & South African Rand (to mention a few) which have suffered double digit depreciations, this relatively narrow trading range for the Rupee gives The Indian economy some room to be optimistic of a speedy economic recovery from the crisis generated by the Covid-19 pandemic.  

The Reserve Bank of India said that it would be accommodative in its stance to help the economy recover from the coronavirus shock and ensure that inflation stays within the target range. The retail price inflation was at its highest in October in more than six years and remained well above its target of 2%-6%. The RBI governor stated that inflation is likely to stay high though we could get some relief in the winter months.  

The real GDP is expected to shrink by around 7.5% for the current financial year, compared to the earlier forecast of 9.5% contraction. This is because of the positive and welcome news about the COVID-19 vaccines.

IMF Forecasts 8.8% GDP Growth in 2021

In its forecast, the International Monetary Fund (IMF) mentioned that the Indian economy is likely to contract by -10.3% this year because of it being severely hit by the coronavirus lockdown. The country initially ordered a 21-day national lockdown, which began on March 25, but was extended for over two months stretching into early June before restrictions were loosened. 

However, the IMF was also optimistic regarding its recovery, saying that India was in an excellent position to start recovering from this crisis because of the government's support, both fiscally and through monetary policies.

The IMF has predicted that India will bounce back in 2021 with economic growth expected to grow to 8.8% provided the government introduces and incorporates effective policies.

The outlook is based on the predictions of an upward revision of global economic contraction of -4.9% from -4.4% in 2020.

Fitch revises its forecast for 2021 

Fitch Solutions has revised its forecast negatively for the Indian rupee, saying the currency will average 77 per US dollar in 2020 and 80 in 2021 amidst ongoing global risk-off sentiment and steep monetary easing.

It saw real GDP growth at 5.8 percent in the next financial year against 5.4 percent in the 2020-21 fiscal. In a note, they mentioned that the rupee's overvaluation and higher inflation relative to the US dollar over the long period would exert downward pressure on the Indian currency.

The rupee's perceived weakness by Fitch, likely started with the rise in risk-off sentiment by investors, when the Reserve Bank of India took over Yes Bank. This raised the investor's concern regarding the stability of the banking sector. The investor has sustained this negative risk sentiment amid growing concerns of the Covid-19 pandemic, which is still prompting a substantial sell-off in global risk assets. Insufficient economic data from Govt authorities that were in lockdown for at least one full quarter, has also hurt investor sentiments and resulted in rupee outflows.

Fitch Solutions said that Indian currency is susceptible to sell-off during periods of risk-offs. It is an emerging market currency with its own structural and fundamental vulnerabilities such as its twin deficit (current account and fiscal account).

It forecasted inflation to remain at 3.1 percent on average over FY2020/21 and FY2021/22, assuming that the country experiences normal monsoons. Retail inflation has remained above the Reserve Bank of India's 2% -6% comfort zone for seven straight months and continues to be so evidenced by high food and petrol prices.

Food and fuel prices tend to have a significant impact on inflation in India. Adverse weather conditions during the harvesting season can easily disrupt the agricultural sector and lead to a surge in inflation due to low crop yields.

Indian rupee to stabilize in 2021

According to strategists polled by Reuters, the Indian rupee is likely to cut some of its losses against the dollar next year. However, it is expected to be weaker against other emerging-market currencies until the Covid-19 pandemic abates. 

The trajectory of the Indian Rupee will primarily depend on the steps taken by the Indian government in containing the spread of COVID-19 and how successful these steps are in a country of more than 1.3 billion people; the second-most-populous country in the world.

There is further weakness predicted for the Indian rupee until global policy measures in the form of wide stimulus measures  start yielding results, and revive economic growth worldwide.

In a poll, 17 of the 39 respondents expected the rupee to depreciate sometime next year, even beyond its recent record low. This is partly attributed to the fact that India's economy was already slowing down before the coronavirus became a global pandemic.

According to Trading Economics, global macro models, and analysts, the Indian Rupee is expected to trade at 74.95 in the next 12 months' time, which stands at around 73.93 at present.

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