By By Veronica Dudei Maia Khongwir
BENGALURU (Reuters) – The Indian rupee will be confined to a narrow trading range against the U.S. dollar over the coming year as the Reserve Bank of India continues to intervene in the market to shield the currency from volatility, a Reuters poll of FX analysts showed.
The dollar fell more than 2% against other major currencies in August, providing breathing space for some emerging market ones. The rupee slipped to an all-time low of 83.97 to the dollar but is down only around 1% so far this year.
That relative stability has been primarily driven by a known pattern of the RBI intervening in FX markets. Its foreign exchange reserves hit a record high of $681.69 billion at the end of last month revealing the central bank has been buying dollars amid expectations for rate cuts by the U.S. Federal Reserve.
The Indian currency was expected to strengthen from Wednesday’s rate of 83.96 to the dollar to 83.75 by the end of November and 83.60 in six months and remain there in a year, the Aug. 2-4 Reuters poll of 45 foreign exchange analysts found.
“Even though the dollar has eased, the rupee has refused to strengthen in line. This is something we had expected in the sense the Reserve Bank of India remains very much present in the market,” Dhiraj Nim, economist at ANZ, said.
“The RBI has got the formula that has worked well for them … they would continue with their two-sided intervention of buying and selling FX to keep the rupee in that narrow range and continue to test this 84 level where the RBI has sort of drawn a line in the sand.”
Analysts said the RBI’s intervention was aimed at returning the partially convertible currency to its fair value as it was currently overvalued by at least 7%.
The latest data from the central bank’s monthly bulletin showed the rupee’s trade-weighted real effective exchange rate was 107.33 in July, the most expensive relative to its trading peers since December 2017.
“I think that (rupee overvaluation) will be addressed because at the end of the day, we need to make sure exports are competitive and that real effective exchange rate is what the RBI will be looking at,” said Suman Chowdhury, chief economist at Acuite Ratings.
Over 40% of respondents, 14 of 35, who had a longer-term view expected the rupee to hit a record low.
(Other stories from the September Reuters foreign exchange poll)