Rupee may weaken to 97, slide to 98.5-99 if key level breaks: Kotak Securities

The Indian rupee could weaken towards 97 against the US dollar in the near term and may fall further to 98.5-99 if the 97 level is breached, according to Anindya Banerjee, Head of Research, Currency, Commodity and Interest Rate Derivatives at Kotak Securities.

Banerjee said the rupee is facing pressure from several fronts, including foreign portfolio investor (FPI) outflows, higher import costs and elevated global yields. While India's macroeconomic indicators remain relatively strong, global factors are weighing on the currency.

FPI outflows have reached around $6.1 billion in the current month, with Banerjee pointing out that nearly 90% of the inflows seen over the past two months have already flowed out.

He also said the recent FCNR(B) inflows have not provided an immediate boost to the rupee because the funds have largely gone into the Reserve Bank of India's reserves rather than directly into the market.

According to Banerjee, the RBI may need to step up intervention if the pressure on the rupee continues.

"Yes, the macros are rock solid, but the global pressure is on, and that is what is keeping the rupee weak, and we might see the levels of 97 very soon. If that breaks, it could go even lower from there."

Oil costs remain a concern

Banerjee said the pressure from crude oil should not be assessed only by looking at futures prices such as Brent. Spot crude prices, freight costs and refined product prices are adding to India's import bill.

He pointed to diesel and aviation fuel prices in particular, saying refinery bottlenecks globally are keeping product prices elevated. This is adding to inflationary pressure and could weigh on the rupee.

Higher fuel and import costs also create a negative sentiment around the currency as they increase the cost burden for consumers and businesses.

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RBI could raise rates further

Banerjee expects the RBI to raise interest rates in the coming months, helped by the liquidity cushion created by recent foreign currency inflows.

He expects the possibility of more than one rate hike, including another increase in December. However, he said the RBI is unlikely to simply follow the US Federal Reserve or chase higher US long-term yields.

The focus, instead, is likely to remain on domestic inflation and maintaining positive real interest rates after adjusting for inflation.

Banerjee described the sharp rise in longer-term US yields as a major global market issue, particularly at the 10-year and longer end of the curve. He said borrowing by large private-sector technology companies is also adding to demand for funds in the US market.

The outlook for global yields remains challenging as long as oil and refined product prices remain elevated, Banerjee said.

He expects the overall yield trajectory to remain higher if energy costs do not ease. However, he also warned that persistently high yields and commodity inflation could eventually put pressure on global economic growth and financial markets.

For full interview, watch accompanying video