India rupee exchange rate: Will INR sink or swim against US dollar in 2019?

At its lowest point this year, the crippled rupee nosedived by as much as 14 percent against the US dollar. October saw INR crash through the 74-barrier and reached an all-time low of 74.39 versus the American greenback off the back of soaring inflation and rising oil prices. However, the rupee has clawed back some ground against the US dollar in recent as weeks as fears of a glut in the supply of oil have sent Crude and Brent prices tumbling. The rupee has been hovering around the 70-mark over the last week.

Going into next year, analysts have suggested one of the major events that could influence the rupee is the upcoming general election that must be held by May 2019.

Indian opposition leader Rahul Gandhi last month saw his Congress party beat Prime Minister Narendra Modi’s Hindu nationalist Bharatiya Janata Party (BJP) in three key state elections.

Mr Ghandi has pressed the Modi institute to waive farm loans to help growers feeling the squeeze from lower food prices.

The Congress party has written off farm loans, a poll promise, in the central states of Madhya Pradesh and Chhattisgarh.

Reuters last month reported that Mr Modi’s government is likely to announce loan waivers worth billions of dollars to claw back support among farmers after losing the three state elections.

If the general election was to not go in the favour of Mr Modi, the rupee could be set to crumble under political uncertainty and lose its recent gains.

Should the Bharatiya Janata Party fail to retain their power, the rupee might see itself under pressure, according to Aditya Pugalia, director of financial markets at Emirates NBD PJSC.

Mr Pugalia told The Times of India: “Should that not happen an results throw up a fragile coalition, then it will put the rupee under pressure.”

Anand James, chief market strategist of Geojit, said the rupee could also see its recovery cut short by an anticipated rates cut by the Reserve Bank of India (RBI).

Following a mammoth nine-hour meeting with board directors, the RBI last month announced it will work together with the government with a set of new fiscal strategies.

It pledged a review of the ‘Prompt Corrective Action’ framework, currently in place for 11 state-controlled banks, which enforces lending restrictions on troubled financial institutes.

India’s monetary policy committee sounded cautious on inflation and preferred to wait for more data to see for how long price pressure and growth momentum would remain soft.

The six-member committee unanimously decided to leave rates unchanged at the meeting in December, while staying optimistic on growth.

The panel, under the new chief Shaktikanta Das, might be more focussed on boosting growth and cutting rates after a recent sharp decline in inflation, the minutes suggested.

Mr James said: “The recent changes at RBI, and the questions over autonomy has prompted rating agencies to raise warnings.

“Agrarian crisis and farm loan waivers ahead of elections could put pressure on fiscal deficit, which is not at an alarming level though.

“Meanwhile, as food disinflation eases and credit flow improves, and with rate cut expectations rising, we could possibly see rupee giving away some of the gains.”

Meanwhile, Mr James predicted there might be renewed volatility in emerging marking currencies as well when the 90 day trade war truce between China and the US ends.

Fitch Ratings has predicted the rupee to weaken to 75 by the end of 2019 on a widening current account deficit and tighter global financing conditions.

Fitch said: “The widening of the current account deficit amidst tighter global financing conditions should put downward pressure on the currency, and we forecast the INR to weaken to 75 against the dollar by end-2019.”

Higher interest rates and rising import prices are also expected from the depreciating rupee, according to Fitch.