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Rupee at 79 against dollar: Worsening CAD and FPI outflows from India to trigger further slide

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HSBC Global Research has raised its USD-INR forecasts to 76 (from 73) for end-2018 and 79 (from 74) for end-2019. The INR weakened beyond our previous year-end forecasts (73 and 74 for this and next year, respectively) in early October.

Although the INR is the fourth worst performing currency in EM year-to-date (outperforming only the ARS, the TRY and the ZAR), we think it is premature to think about undervaluation and recovery. In the first place, the current value of USD-INR is still within the 67-79 fair value zone of HSBC’s Little Mac Valuation Range.

More importantly, we believe the drivers of the exchange rate recently—the current account deficit (CAD) and foreigners’ portfolio outflows—are only going to get more disadvantageous for the INR in the coming quarters.

HSBC’s economists expect India’s CAD to widen from $16 billion, or 2.4% of GDP in April-June, to a total $75 billion, or 2.8% of GDP for the whole of FY2019. And the risk is for a higher deficit, since the underlying assumption is that the Brent oil price averages $75 per barrel in FY2019 (which requires oil prices to stay around $73 per barrel for the next six months—a tall order) and since India’s oil demand may become less price elastic as the government is now trying to limit the pass-through of high oil prices to consumers.

It will be difficult to fund the current account deficit with just net FDI inflows. These have........

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