A weaver displays ten rupees Indian banknotes for a photograph in Varanasi, Uttar Pradesh. (Photographer: Dhiraj Singh/Bloomberg)

Double Blow to Rupee Quells Revival Hope for Worst Asia Currency

(Bloomberg) -- Rupee bulls should put to rest any hope of a respite for Asia’s worst currency in the last few days of what’s been a dreadful year.

This week’s shock departure of India’s central bank chief and defeat for Prime Minister Narendra Modi’s ruling party in key state elections have dealt a double blow to the currency, taking its year-to-date loss to 11 percent. Mizuho Bank Ltd. is expecting more pain.

The rupee may drop to about 73 per dollar as Urjit Patel’s resignation leads foreign investors to fret over the Reserve Bank of India’s independence and policy continuity, according to Masakatsu Fukaya, an emerging-market currency trader at Mizuho in Tokyo. A break of that level may open the door for a slide to 74, he said.

Double Blow to Rupee Quells Revival Hope for Worst Asia Currency

While the government has rushed to appoint Shaktikanta Das -- a former bureaucrat -- as the new RBI governor, investors would want to see if that resolves differences seen between the central bank and the administration in the run-up to Patel’s exit.

They will also have to contend with political uncertainty after Modi’s Bharatiya Janata Party faced defeat in three key states, helping his main opponents seize back momentum ahead of India’s 2019 national vote. The loss amounts to Modi’s biggest political setback since taking office in 2014.

“A potential implication from BJP not having a strong hold in state elections would be the risk of more populist policies,” which may add to India’s fiscal slippage, said Frances Cheung, head of Asia macro strategy at Westpac Banking Corp. in Singapore. That, along with any potential change in the RBI’s monetary-policy stance due to the appointment of a new governor, “does not bode well for the rupee,” she said.

‘Tough Going’

Bank of America Merrill Lynch is also predicting short-term weakness for the rupee, which slid 1.5 percent over the last two days to close at 71.8575 per dollar on Tuesday.

The currency will depreciate also because “oil prices have bottomed for the time being,” Adarsh Sinha, co-head of Asia rates and currency strategy at BofAML, said on Bloomberg Television. “Over the next three to four months, it’s going to be tough going for the Indian rupee heading into the general election where there is some uncertainty around the BJP has to form a coalition or not.”

Sinha said the central bank could cut rates as soon as February, partly because inflation has undershot its target “quite considerably.” There’s a “justifiable case for the RBI to ease monetary policy irrespective of who the governor was,” he said.

©2018 Bloomberg L.P.