Budget 2018: Jaitley's speech, deficit data to decide rupee's fate in 2018

Don’t let the rupee’s strength fool you, strategists say. The rally that boosted the currency to the strongest in 32 months will probably be short-lived.

The rupee is facing headwinds as elevated energy prices threaten to increase inflation and worsen public finances in a nation that imports most of its oil needs. Traders are also bracing for higher government spending as Prime Minister Narendra Modi is set to take measures in the February budget to revive an economy that’s forecast to grow at the slowest pace in four years.

How Modi fares in reining in the fiscal deficit while seeking to jump-start activity may determine the currency’s direction for the remainder of the year, analysts say.

“The budget could well set the tone for the rupee in 2018,” said Aditya Pugalia, Dubai-based director of financial markets at Emirates NBD PJSC, the second most-accurate forecaster in Bloomberg’s quarterly rankings. “A slip-up on the deficit could add a layer of uncertainty.”

Emirates NBD predicts the rupee will weaken to 65 per dollar by the end of March. Mizuho Bank Ltd., the third-best forecaster in Bloomberg’s survey, sees it depreciating to 65.60, while the median estimate in a Bloomberg survey is 64.50. The rupee advanced to 63.2463 on Jan. 8, the strongest since April 2015. It rose 0.3 percent Monday to 63.4175.

The forecasts mark a turnaround in sentiment. The rupee strengthened in 2017 for the first time in seven years as slow inflation, stable commodity prices and a slew of policy reforms lured about $30 billion of foreign inflows into India’s stocks and bonds. Readmore