Abandon ship? Indian rupee could fall to 17.70 against UAE dirham

Investment bank Goldman Sachs has issued an ‘abandon ship’ rating for Indian stocks, downgrading the emerging market’s equities to an ‘underweight’ status on concerns that growth recovery will remain sluggish.

“We downgrade Indian markets to ‘underweight’ and recommend investors to stay selective,” the investment bank said on Wednesday in a note to its clients as investment demand shows no signs of a pick-up.

“Recent activity data has been sluggish with no signs of a pick-up in investment demand,” said the Goldman Sachs note authored by the investment bank’s Hong Kong analyst Sunil Koul. “The external funding environment has also become challenging, causing RBI to tighten liquidity,” the note added.

In addition, while Goldman Sachs has maintained its forecast for the dollar/rupee to remain at Rs60 vs. $1 (Rs16.33 vs. Dh1), it highlighted that the investment bank expects continued weakness to Rs65 vs. $1 (Rs17.69 vs Dh1) through 2016.

“The rupee remains inexpensive relative to our fair value estimate of $/rupee 65 which also suggests the currency can continue to weaken,” it said in the note.

The Indian rupee has come under massive selling pressure of late, and slumped to a fresh lifetime low of Rs16.65 vs. Dh1 a couple of days ago, on July 31, 2013.

Indian authorities have taken a number of measures to prop up the sagging currency, including hiking the price of petrol (an imported commodity for which India has to cough up hard-to-come-by US dollars) five times in the past two months.

The rupee has lost about 40 per cent of its value in the last 24 months, from Rs11.99 vs. Dh1 on August 2, 2011, to Rs16.65 vs. Dh1 on July 31, 2013. The last three months have seen an accelerated decline, with the rupee plunging 14 per cent since early May.

Indian markets too have been witnessing a massive outflow of foreign funds, with foreign investors dumping $2 billion of Indian debt last month through July 30, over and above the record $5.4 billion withdrawal in June.

According to Bloomberg data, the two-month foreign funds outflow over June and July from Indian stocks reached $2.8 billion, which the newswire says is the most since the global financial crisis in November 2008.

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