Deutsche Bank Joins Mizuho in Forecasting More Pain for Rupee

(Bloomberg) -- Deutsche Bank AG and Mizuho Bank Ltd. are forecasting more losses for India’s rupee, Asia’s second-worst performer, as a widening trade deficit and capital outflows amid a bank fraud sour the sentiment for the currency.

The lenders see the rupee weakening to as much as 66 per dollar in 2018, implying a 1.8 percent decline from Monday’s close. The Indian currency has slid 1.4 percent against the greenback since Jan. 1, just less than the Philippine peso in Asia.

“The worsening trade deficit on the back of higher oil prices, the recent bank scandal that has resulted in foreign equity outflows and news that the RBI is looking to tighten offshore borrowing have conspired to weaken the rupee, from what had been overvalued levels,” said Khoon Goh, head of research at Australia and New Zealand Banking Group Ltd. in Singapore.

• Trade gap widened the most in more than 4 1/2 years in January as imports surged, which is expected to worsen the current-account deficit
• The $2 billion fraud at Punjab National Bank has hurt investor confidence and raised worries about the availability of trade credit. Global funds have pulled $583 million from local stocks since the scam surfaced on Feb. 14.
• Reserve Bank of India is reviewing its process for allowing companies to raise money abroad on concern that any increase in rupee volatility may hurt borrowers’ ability to repay debt, a person familiar with the matter said. A scarcity of dollar supply may make the dollar more expensive versus the local currency.

Following are views from strategists:

Deutsche Bank (Kaushik Das, chief economist for India)

• Maintains a “slightly conservative view” regarding the rupee given that current-account deficit will rise toward 2% of GDP in FY19 amid a volatile global environment
• Sees USD/INR trading in the broad range of 64-66 through 2018, with rupee likely to end the year closer to the upper band

ING Groep NV (Prakash Sakpal, Singapore-based economist)

• INR should remain weak considering current economic situation of below-potential growth, rising inflation and worsening fiscal and external payments situation
• The Punjab National Bank fraud certainly worsens investor confidence. Large bad loans have already been a big problem for the banking sector and latest scams add to this risk by eroding banks’ and corporate balance sheets
• Forecasts USD/INR at 64.90 in 3 months; 65.50 for year-end

Mizuho Bank (Vishnu Varathan, Singapore-based head of economics and strategy)

• The "Anti-Goldilocks" situation of higher oil impacting the twin deficits and higher inflation is taking some wind out of INR sail
• As for the bank scandal, immediate trigger for INR bears may have to do with warnings from ratings companies
• 3-month view of USD/INR risks tilted to 65-66 remain in the near-term; further out, view of USD/INR below 63 being reinstated in 12-15 month horizon maintained

Credit Suisse Group AG (analysts including Neelkanth Mishra)

• Unlike in the run-up to the mid-2013 crisis, short-term trade credit has not built up, but if roll-over challenges persist due to the Punjab National Bank fraud, there could be some pressure on INR and domestic liquidity
• While a lack of trade finance roll-over has pressured the rupee, January was a month of significant relative underperformance despite a stable USD/INR
• RBI’s record reserves to prevent steep fall in currency

Morgan Stanley (analysts including James K Lord)

• Bearish on INR via long 3-month MYR/INR NDF position

--With assistance from Masaki Kondo

To contact the reporter on this story: Subhadip Sircar in Mumbai at ssircar3@bloomberg.net.

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Ravil Shirodkar

©2018 Bloomberg L.P.