(Bloomberg) -- The Indian rupee is expected to weaken further against the dollar, after hitting a new low Monday, as traders bet on interest-rate cuts amid signs the central bank is loosening its grip on the currency under its new chief.
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The Reserve Bank of India will reduce the repurchase rate by 25 basis points Friday, the first easing since the pandemic, a Bloomberg survey of economists showed. That will add to pressure on the currency after US tariffs rattled Asian markets.
The rupee may decline to 88.70 per dollar by the year-end, according to Australia and New Zealand Banking Group Ltd. Emkay Global Financial Services Ltd. is forecasting a fall to 89.50 by December. It fell as much as 0.8% to 87.29 after markets reopened post Saturday’s federal budget.
“Over the last few months there is a change in RBI’s currency management with a rise in the pace of rupee depreciation,” said Gaura Sen Gupta, chief economist at IDFC FIRST Bank Ltd. “We expect depreciation pressure to persist, given the overvaluation in the rupee and muted capital flows.”
The rupee turned into Asia’s second worst-performing currency this year, after beating most peers last quarter. It has dropped by nearly 3% since Sanjay Malhotra’s appointment as governor in December as he signaled a willingness to allow the local currency move more freely in tandem with peers in the region.
The RBI’s interventions in the foreign exchange market under former governor Shaktikanta Das made it one of the most stable currencies in the world. The RBI steadily built up reserves of over $700 billion and used them to quell volatility.
The Indian unit’s real-effective exchange rate, a gauge of its competitiveness against peers, rose to a record 108.13 in November, before receding a bit last month. Though it still remains in the overvalued territory, the shift in RBI’s policy and an exodus by foreign funds is pushing it toward further weakening.
Overseas investors net sold more than $8 billion from Indian stocks in January due to worries over a slowing economy and weak corporate earnings. Global uncertainty is also adding to the mix as investors trim exposure to emerging markets.
The dollar surged while other currencies dropped after US President Donald Trump imposed tariffs on imports from Canada, Mexico, and China, signaling the beginning of a new round of global trade war. Indian officials downplayed the impact of the move on the rupee, saying the central bank will continue to care of volatility.