INR/USD to hit a low of 66 by mid-2018

Summary

2017 was a good year for the Indian rupee, as it strengthened against the dollar by 5.6%. The appreciation was on the back of an increase in capital inflows, supported by major structural reforms such as the historic Goods and Services Tax (GST). Further, the higher real interest rates in the economy attracted capital and helped the rupee strengthen. The forex reserves touched a record high of more than USD 400 billion by the end of the year 2017. In the first half of 2018, we see a few important risks to the rupee. With oil prices on the rise, the current account deficit (CAD) would widen and may weaken the rupee. Further, rising domestic inflation, risks of fiscal slippage and expected rate hikes in the US are likely to add to the weakening of the rupee. However, toward the end of 2018, we expect to see these risks to be mitigated to some extent by a recovery in the domestic growth, a comfortable cushion of forex reserves, improvement in the export performance and benefits due to the stabilization of GST regime in 2018.

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