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No Love for India's Rupee as Analysts Rush to Cut Forecasts

India imports two-thirds of its crude requirements and the spurt in oil prices has coincided with the slowdown in capital inflows.

[MUMBAI] India’s widening current-account deficit is coming back to haunt the rupee, with analysts clamoring to lower forecasts on Asia’s second-worst performing currency. It fell by the most since February.

Standard Chartered, Australia & New Zealand Banking Group, TD Securities and Malayan Bank have pared their targets for the currency. Kotak Mahindra Bank Ltd. has gone so far as to say that the rupee could fall past its 2016 record low of 68.89 per dollar if global and local risks play out.

“Hit by a combination of higher oil prices, rising external vulnerabilities and a sharp slowdown in portfolio flows, the rupee is likely to remain prone to further depreciation pressures,” Mitul Kotecha, senior emerging markets strategist at TD Securities wrote in a note Wednesday.

India imports two-thirds of its crude requirements and the spurt in oil prices has coincided with the slowdown in capital inflows. Foreigners have turned net sellers of Indian equities in April and have pulled US$1.1 billion from its bonds this year amid hardening global yields - and more recently after the Reserve Bank of India surprised the market with hawkish minutes.

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The currency fell as much as 0.6 per cent, the biggest intraday decline since February, to 66.8087, before trading at 66.7663.

“While the sharp sell-off in equity markets globally prompted funds to pull away from the region, domestic factors like fiscal slippage, bank scandals and a more hawkish RBI have affected flows to India,” Khoon Goh and Rini Sen, strategists at ANZ wrote in a note Tuesday. The bank cut its end-2018 rupee forecast to 67 to a dollar from 66.

Indian rupee is no longer in the sweet spot it was in last year as the surge in oil prices is a game changer, Maybank analysts led by Saktiandi Supaat wrote in note. It sees the rupee at 66 per dollar by end-2018 from its previous forecast of 63.5.

One of the sharpest revisions has come from Standard Chartered Bank. The lender reduced its second-quarter forecast to 66 per dollar from 62, and expects the rupee to end the year at 65.50 versus 61.50 previously.

India’s current-account deficit widened to US$13.5 billion in the three months ended December from US$7.21 billion in the previous quarter, as the trade gap widened. The rupee is expected to traded at 64.88 by the end of this year, according to the median forecast of analysts surveyed by Bloomberg.

“INR is likely to face increasing two-way risks over the medium term,” Divya Devesh, Asia FX strategist at Standard Chartered wrote. “The period of INR outperformance is likely over.”