SINGAPORE: Fitch Solutions on Thursday revised its forecast for Indian rupee to average Rs 73.50 per US dollar in 2021, slightly stronger from Rs 75.50 per US dollar previously, which reflects its view for the rupee to mostly trade sideways over the course of year.
While rising oil prices will worsen India’s terms of trade and put depreciatory pressure on the rupee, it said, this is likely to be offset by a combination of intervention by the Reserve Bank of India (RBI) and a weakening bias of US dollar due to ultra-loose monetary and fiscal policy in the United States. “Accordingly, we have also revised our 2022 forecast down to an average of Rs 75.50 per US dollar from Rs 77 per US dollar previously which still reflects our long-term rupee weakening view due to its real overvaluation and higher inflation in India versus the United States,” said Fitch.
The Indian rupee has appreciated by 0.6 per cent since its December 2020 forecast and averaged Rs 73 per US dollar in the 2021 year-to-date. “We expect mostly sideways trading for the rupee over 2021 and have revised our average forecast to Rs 73.50 per US dollar from Rs 75.50 per US dollar. Fitch also expects another 25 basis points worth of cuts to the RBI’s policy repurchase rate which currently stand at 4 per cent in 2021and this could exert some downward pressure on the rupee.
While real GDP growth is likely to print 9.5 per cent in FY22 (April 2021 to March 2022), much of this is due to low base effects from a normalisation of economic activity post lockdown in Q1 FY21 (March 25, 2020 to May 31, 2020) and masks still weak underlying economic fundamentals.
As such, said Fitch, significant fiscal and monetary support will still be necessary over the coming months.
