BENGALURU- India's rupee is expected to reverse recent gains and weaken over the coming year, hurt by monetary policy easing, but the outcome of the national election is also likely to be key driver of its direction, a Reuters poll found.
The rupee was the worst performing Asian currency last year but gained over 2 percent in March despite the Reserve Bank of India easing policy in February and expectations for it to do so again later on Thursday.
However, those gains are expected to be short-lived amid rising uncertainty around the national election and other factors such as a steady increase in oil prices and a slowdown in economic growth, dampening the currency's outlook.
In the latest survey of nearly 50 strategists, taken April 1-3, the rupee was forecast to weaken about 3 percent over the next year to 70.38 per dollar from around 68.45 on Wednesday.
"The coming general elections carry a near-term risk for the currency, especially if results are contrary to what markets expect," noted Rini Sen, FX strategist at ANZ.
"However, a comprehensive party or a coalition victory could add to the rupee's upside, in line with its performance during past election cycles. We are mindful of the rupee's stretched valuations, as well, which will likely deteriorate further given recent currency strength."
The currency is not expected to get support from the RBI as it prepares for further policy easing in response to tepid retail inflation and a slowdown in economic growth.
"RBI policy hasn't been friendly for the INR since last year.. Now they are taking advantage of the positive emerging market sentiment and cutting rates as the government wants the RBI to do and a rate cut is not friendly for the currency," said Prakash Sakpal, Asia economist at ING.
Still, the latest 12-month prediction was the strongest since a September poll and only two respondents expect the rupee to breach its all-time weakest rate of 74.48 against the dollar, hit on October 11 last year, in the forecast horizon.
Over three-quarters of common contributors to the latest and last month's poll strengthened their 12-month outlook.
Bullish bets on the rupee have firmed over the past few weeks, according to a separate Reuters poll on Asian currency positioning, as re-election prospects have brightened for the ruling Bharatiya Janta Party (BJP).
That is broadly in line with a separate Reuters poll in which economists unanimously said the BJP winning a majority or a BJP-led NDA (National Democratic Alliance) government would be best for economic growth.
"Besides politics, inflation is going to pick up going forward - it has already turned the corner. We also have the other major rupee negative - which is oil prices, and that is creeping up too," added ING's Sakpal.
"So, it is hard to imagine the currency will stay permanently below the 70 rate while we have the political risks rising ahead of elections."