Rupee to hit 73 by Mar 2019; fiscal target to be breached, says report

As global uncertainties escalate, emerging economies like India which are running twin deficits are likely to face heightened financial market volatility

India is the only major emerging market having a negative balance of payments (BoP) and the pressure is expected to sustain, a Swiss brokerage said Monday, expecting the rupee to depreciate to 73 by March 2019.

Shortfalls in GST collection and divestments, coupled with state finances being under strain will take the consolidated fiscal deficit to 6.5 per cent in FY19, against the government’s budget estimate of 5.9 per cent, UBS said.

A country's external balances constitute one of the key factors influencing the currency and weakness in it has led to a 12 per cent depreciation in the rupee till now, it said. “We revise our FY19 current account deficit (CAD) forecast to 2.7 per cent of GDP in FY19 from 2.5 per cent, much above the sustainable threshold. This would put India’s overall BoP in a deficit of around 1 per cent of GDP, the first in seven years,” the brokerage said.

Expecting pressures on the BoP to continue till FY20, it revised its year-end rupee level estimate to 73 against the dollar, compared with the earlier 66. “If the external emerging market risks do not ease, or trade protectionism rises further, the rupee could weaken well past our FY19 year-end forecast,” it warned.

The brokerage explained that as global uncertainties escalate, emerging economies like India which are running twin deficits (CAD and fiscal) are likely to face heightened financial market volatility as well as downside risks to their potential growth outlook.

It said after the strong start in the first quarter, economic growth will slow down to 7-7.3 per cent in the second half of the fiscal. “We believe headwinds, including tighter financial conditions, high oil prices, slowing global growth and a still muted private corporate capex recovery on legacy issues of high debt and weakened balance sheets will weigh on India’s growth momentum,” it said. It estimated the full year economic growth to come in at 7.5 per cent, up from 6.7 per cent in the year-ago period.

The note said inflation will be at "manageable" levels but underlined the monitor the risks coming from the ongoing rupee depreciation.

It expects India to miss its consolidated fiscal deficit for fiscal year 2018-19 on difficulties on GST collection, divestments, as also stretched state government finances.

"There is a risk that the combined fiscal deficit remains elevated at 6.5 per cent in FY19 (versus the government's budget estimate of 5.9 per cent) on concerns related to revenue shortfall (on GST, divestment etc), higher states' fiscal deficit, and the risk of populist spending ahead of 2019 elections," it said in the note.

It can be noted that the government has committed to reduce its fiscal deficit to 3.3 per cent. The brokerage said it expects a shortfall of up to Rs 300 billion in GST collections for FY19, unless there is a significant increase in tax compliance or the GST council agrees with the recently passed amendments related to unallocated compensation cess to be shared between the Centre and states.

It expects the Reserve Bank of India to hike its key rates by 0.50 per cent more due to financial stability concerns on rising oil prices, capital outflows, populist spending and political uncertainty.