According to the Bank of America, India’s rupee may extend declines to a record-low 81 per dollar by year-end due to rising prices of crude and other raw materials, Bloomberg reported.
The currency has already slumped more than 5% this year as Russia’s invasion of Ukraine sent Brent crude surging to almost $140 a barrel in March. The rally in energy prices has worsened India’s external finances as the nation relies on imports to meet about 80% of its oil requirements, BofA said.
In Wednesday's trade, the rupee slipped to a new lifetime low of 78.38 to a dollar. Prior to this, the rupee had touched an intraday low of 78.28 on June 13.
The rupee “has continued to depreciate beyond our expectation of a gradual trend weakness,” Abhay Gupta, a strategist at BofA Securities in Mumbai, wrote in a note to clients. “The fundamental outlook has deteriorated further primarily due to higher oil and other commodities.”
Gupta’s new year-end prediction of 81 per dollar is more bearish than all 23 forecasts in a Bloomberg survey.
After the Philippine peso and the Thai baht, the rupee was the third-worst performing Asian currency.
High oil prices and continued FPI outflows are two of the major reasons that are impacting the domestic currency.
This calendar year, foreign portfolio investors sold a net of $28.48 billion in local securities, according to data from NSDL.
As per the RBI study, there is a 5-per-cent chance of portfolio outflows from India of the order of 3.2 per cent of GDP or $100.6 billion in a year in response to a Covid-type contraction in real GDP growth or a GFC (global financial crisis) type decline in interest rate differentials vis-a-vis the US or a GFC type surge in the volatility index (VIX).
Meanwhile, BofA has slashed its year-end target for the Nifty to 14,500 points from 16,000.
BofA has remained cautious on the Indian markets and has cited five reasons for its stance. which include fast tightening monetary conditions, slowing growth and fears of a US recession, earnings cuts, prices of crude oil and valuations.
According to the brokerage, most of the above negative events are either likely to play out over the next two-three months or more clarity will emerge on these fronts. These negatives could be priced in, leading to a market bottom by August-September.
However, Indian equities have outperformed their global counterparts, with the Nifty down 11% versus the S&P 500 down 23%.