Strong US dollar to continue to weigh on rupee: DBS

The strong US dollar is expected to further weigh on the Indian rupee, which hit a low past the 70-mark against the greenback in recent foreign exchange movements, according to Singapore's DBS Bank Group today.

"A challenging global environment has compelled the Reserve Bank of India (RBI) to intervene aggressively this year to contain INR depreciation. Foreign reserves have declined from a record high of USD 426 billion in April to USD 403 billion in early August," said the bank in its daily market report.

Contagion worries from the US-Turkey saber-rattling hurt the emerging markets (EM) currencies, with the Indian rupee depreciating to a record low past 70 per USD (down 9 per cent year-to-date), noted DBS.

Fund allocations away from EMs is likely to persist as the US Fed tightens policy.

We expect further risk-off trades and USD strength to weigh on the Indian rupee, it said in the report India chart book: Growth is back, so is volatility.

Comfortable adequacy ratios suggest there is more room to battle foreign exchange volatility.

Inflationary risks have receded for the short-term helped by base effects and seasonal factors, but rupee direction and oil are risks for inflationary expectations. The RBI-led monetary policy committee front-loaded rate hikes to contain elevated core inflation. Inflation out-turns will dictate monetary policy, especially if persistent and sharp rupee weakness adds to the risks, it said.

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"We retain our call for a 25-bp hike in the March 2019 quarter, with the door open for more if risk conditions deteriorate sharply," said DBS.

The fiscal year 2019 growth trajectory should be viewed in two halves strong first half before momentum tapers, said DBS. We revise up our real GDP estimate to 7.4 per cent from 7.2 per cent previously.