Rupee may weaken towards 98 as oil and US yields pressure EMs: David Hauner of BofA Securities

BofA Securities expects the rupee to remain under pressure and potentially weaken towards 98 against the US dollar over the next few months as higher oil prices, sticky inflation and rising US bond yields keep global markets volatile.

David Hauner, Head-Global EM Fixed Income Strategy at BofA Securities, said the near-term environment remains difficult for emerging markets, even though the longer-term outlook remains positive.

“In the short term, meaning for the next several months, we think there will be higher rate volatility,” Hauner said. He added that BofA expects the short end of the US yield curve to move higher, which could keep the dollar strong globally.

Hauner said elevated energy prices are likely to keep inflation pressures high for longer, even if geopolitical tensions ease quickly. According to him, rebuilding global energy inventories and easing supply chain disruptions will take time, meaning the inflation impact could continue through most of the year.

That is one reason BofA expects continued pressure on emerging market currencies, including the rupee. “We see dollar rupee still going higher. We have it at 98,” Hauner said.

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However, he stressed that the bearish view is mainly for the next few months and not a long-term call on emerging markets. Hauner said BofA remains “bullish for emerging markets from a structural perspective” and expects the dollar to weaken eventually as global conditions normalise.

He believes global investors are still heavily overweight US assets after years of strong returns from American markets, while emerging market assets remain underowned. According to him, that trend could reverse once lower rates and a weaker dollar return globally.

Hauner also said emerging market equities have already performed well this year, but the next phase of gains may depend on a return to domestic demand-led growth stories rather than just technology-driven rallies.

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On the investment side, BofA is currently preferring higher-yielding emerging market currencies that are less vulnerable to oil price shocks. Hauner highlighted currencies such as the Brazilian real, Colombian peso and Turkish lira as preferred opportunities in the current environment.

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He also said the Chinese currency remains undervalued from a balance-of-payments perspective and could offer value over the longer term.

On Indian bond markets, Hauner said inclusion in global bond indices would be positive, though he does not see index events alone as game changers. According to him, fundamentals remain the key driver for investors over the long term.

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