The rupee has fallen sharply against the US dollar this fiscal, losing nearly 13.8% beginning April to October 31, as global headwinds multiplied and the current account deficit (CAD) widened.
On average basis, the decline is less steep at 7.4% on-year, but still much higher than the trend rate of depreciation, of ~2.5% average per year, in the last fifteen years.
So, is a course reversal possible? Indications say yes, with some correction from where we stand today on the horizon, unless global conditions turn more adverse.
We believe the rupee can strengthen to 71 per US dollar by March 2019. This is our base case, with 50% probability of occurrence. The falling oil prices and currency swap deal with Japan should provide some support to the rupee.
However, there is a 35% probability of the rupee settling at 74 per US dollar, and a 15% probability of it appreciating to our previous forecast of 68.5 per US dollar.
Risks are tilted on the downside because rising interest rates in the US could continue capital outflows from India, putting pressure on the rupee.