Rupee seen bottoming out despite taper risks: Reuters poll

By Sumanta Dey

BANGALORE (Reuters) - India's rupee has likely bottomed out after a 20 percent plunge to record lows last week, but it is not expected to regain much ground over the coming year, a Reuters poll showed.

The poll also showed analysts expect the Chinese yuan will continue to appreciate, albeit slowly, over the same time period as the economy improves.

Despite the threat of the U.S. Federal Reserve reducing its stimulus programme this month, the rupee is not seen weakening any further over the next year.

Concerns over India's yawning current account deficit and rising bond yields in the United States have prompted foreign investors to dump emerging market assets since May, pummelling the rupee, stocks and bonds.

Even Raghuram Rajan's appointment as the new head of the Reserve Bank of India in early August failed to stem the rot. The rupee has slid 7 percent since then and is the worst performer among its emerging market peers.

The rapidly falling rupee has also caused inflation to tick higher since rising crude oil and gold prices, two of India's most imported items, have swollen the country's already bloated import bill.

However, the rupee has shown some signs of stabilisation since Wednesday, when Rajan, in his first day in office, stunned markets by announcing a slew of measures to regain market confidence and improve dollar inflows.

The steps ranged from better communication with financial markets to improved trade financing and easier norms for Indians abroad to remit dollars.

As a result, many large financial institutions raced to revise their calls for the rupee.

Median expectations from 17 strategists in the poll conducted this week were for the dollar to fetch 66 rupees at the end of September, roughly around its rate on Friday.

It is then seen firming slightly to 65 rupees a dollar by November and 64.5 rupees by August 2014.

Those expectations are markedly worse than what analysts predicted in a similar poll last month and is likely a result of the weak sentiment in the rupee after the slide in August.

Technical analysis may also suggest there may be a respite for the currency.

Some analysts, however, say the worst is not yet over for the rupee, especially if the Fed goes ahead with its plan of reducing its $85 billion a month bond purchases when it meets September 17-18, and depending on how much it tapers.

"The reaction in currency markets will probably depend more on how much the Fed decides to taper, and its forward guidance in its statement," said Janu Chan, analyst at St. George Bank in Sydney.

"Tapering of around $15 billion or more would likely see the U.S. dollar rise, particularly if there are hints of further tapering in its statement."

A few analysts said the rupee could hit 70 or 72 to the dollar between this month and early next year.

India's meagre currency reserves, just enough to cover seven months' imports, also means the RBI has limited options in trying to stem the slide by intervening in currency markets and selling dollars.

India's is not alone in fighting a free-falling currency. From Turkey, to South Africa, to Brazil, to Indonesia, most emerging nations are reeling under market pressure on their respective currencies.

Falls range from 14 percent for the Brazilian real and 12 percent for the Indonesian rupiah and South African rand since the beginning of May.

Brazil, China, India, Russia and South Africa announced on Thursday, on the sidelines of the G20 summit in St. Petersburg, a plan to set up a currency reserve pool of $100 billion to fight persistent depreciation in their respective currencies.

Analysts in the poll said the RBI could do more, from financial reforms to introduction of dollar-denominated bonds to even tightening monetary policy if the rupee falls further.

But with Indian economic growth sliding to 4.4 percent between April to June, an increase in interest rates would further sour business sentiment in the country.

YUAN TO SCALE NEW HIGHS

Meanwhile, the poll also showed the Chinese yuan will strengthen a little from current levels to trade at 6.11 in 6 months and 6.09 in twelve months. Those predictions are roughly unchanged from last month's survey.

Data due next week is expected to confirm that Beijing has prevented a sharp slowdown in its economy after the government announced reforms and policies to encourage investment.

"There are some emerging signs of modest economic recovery which makes us believe that the Chinese authorities will continue to move forward with reform of the dollar/yuan market, said Derek Halpenny, analyst at BTMU in London.

"Our forecast profile assumes a band widening will be announced by the Chinese authorities in September."

The People's Bank of China has recently set a series of higher midpoints for the yuan, slowly allowing the currency to appreciate to record highs last month.

(Editing by Kim Coghill)