The Indian rupee could crash to 70 against the U.S. dollar in a month or so, Deutsche Bank said in a report on Wednesday. The ominous forecast comes at a time when the partially convertible rupee has breached 64 to the dollar to a record low.
"We continue to believe that fundamentally the rupee is undervalued and has overshot its equilibrium level substantially, but as numerous episodes of past currency crises have amply demonstrated, under a scenario of deep pessimism, currencies can overshoot substantially and remain so for a long time," economists at Deutsche Bank wrote in the report.
"India, we fear, is entering such a zone".
Many analysts had forecast in July that the rupee is headed to 65-70 levels, so in a sense the Deutsche Bank's forecast does not ring alarm bells in the current scenario.
In the last week of June, when the rupee was still trading around 60 levels, Nomura's forex valuation analyst had said the rupee can slide all the way to near 70. (Read: Why the rupee may fall to 70 against dollar)
Mohammed Apabhai of Citi had told NDTV in early July that the rupee might stabilize around the mid-60s levels.
But these predictions were supposed to come true over the course of several months and not days. The rupee has crashed nearly 15 per cent since the U.S. Fed first hinted about a possible tapering of its massive bond buying programmed on May 22.
It's no surprise that it's the worst performing currency in Asia and among the worst performing currencies in emerging markets.
Arvind Narayanan, head of sales (treasury & markets) at DBS told NDTV on Tuesday that the depreciation is not a surprise, but the pace of fall in the rupee certainly has stumped economists.
With the rupee trading in an unchartered territory, analysts refuse to put out a specific level. However, considering the over 5 per cent depreciation in the rupee over the last one month, there just might be a case when the rupee overshoots even the 70 mark against the greenback.
In a surprising move, the Reserve Bank on Tuesday said it would buy long-dated government bonds worth Rs. 8,000 crore through an open market operation on August 23 and would decide after that on the amount and frequency of further operations as warranted.
The bond buying comes after a series of liquidity-tightening measures failed to support the rupee although these steps sent interest rates surging.
RBI's latest move helped the rupee post mild gains in the morning and the Sensex soared over 300 points in early trade. However, the rupee slipped soon and markets pared gains.
The rupee dropped to a record low of 64.13 per dollar on Tuesday and was trading at 63.38/45 on Wednesday, weaker than its close of 63.25/26.
Sanjeev Sanyal, global strategist at Deutsche Bank AG told NDTV today that the Reserve Bank should stabilize the rupee and prevent it from spiraling down.
"The danger is you get back into a rupee spiral, with inflation rising because of rupee fall and then rupee weakening further because of the inflation," he added.
Other analysts say unless the government takes steps to address the bigger worries -- a record current account deficit and stuttering growth - it will be difficult to prevent the slide in the rupee.
(With inputs from Reuters)