The Indian rupee will erase some of this year's losses against the dollar over the coming 12 months but high volatility in the run up to general elections in 2019 could send it off-piste, a Reuters poll found.

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A selloff in emerging markets and a widening fiscal deficit, exacerbated by rising oil prices - India's biggest import bill - has hurt the rupee this year.

The Indian currency hit an 18-month low of 68.47 per dollar in May and is down over 5 percent so far this year, making it one of the worst performers in Asia.

But the rupee is forecast to rebound and gain slightly to 66.87 in a year from about 67.45 on Tuesday, according to the poll of about 30 foreign exchange analysts taken after the Reserve Bank of India hiked interest rates on June 6.

That median, although slightly weaker than in May, was driven by expectations for Asia's third largest economy to remain the fastest growing major economy as it did in the first three months of 2018 and on predictions for further interest rate hikes from the RBI.

"The INR continues to be alluring with more robust growth and compelling FX reserve backstop," said Vishnu Varathan, head of economics and strategy for Mizuho Bank in Singapore.

"So once election risks fade and oil price ascendancy is subdued by supply-demand gaps ironing out - mostly via higher U.S. and OPEC supply - we expect the rupee will regain some traction as some of the risk premium - which pressures the currency now - erodes."

The rupee was also expected to get a boost from a weaker dollar outlook.

"We expect the dollar to start weakening around the end of this year or the start of next year. Weaker dollar is expected to support most emerging market currencies," said Amy Yuan Zhuang, chief Asia analyst at Nordea.

But not everyone was convinced, with the year-ahead forecasts in the widest range in Reuters polls since July 2016, suggesting the rupee's level in the run up to the general elections next year is far from clear.

Rising inflation is a well-established risk and any further rapid rise in global crude prices would weigh heavily on the fiscal arithmetic, which is already widening.

In addition, the government is set to increase spending on populist measures ahead of the May general elections, which is likely to make foreign investors nervous.

Over a quarter of nearly 30 respondents in the latest poll, who gave a forecast for the currency in a year, expect the rupee to weaken to below the historic low of 68.8985 per dollar.

"Indian rupee will depreciate particularly due to political uncertainties built-up before the general elections next year," according to Nirmal Bang's economist, Teresa John, who forecasts the currency to weaken to 70 in a year.

"Anything beyond the 70 mark should really be a cause for alarm, and if the currency falls below 69.5, there will be heavy RBI intervention," John added.

STEADY YUAN TO GAIN SLIGHTLY

China's yuan, which has gained nearly 1.6 percent so far in 2018, is expected to strengthen further to 6.38 per dollar in a year.

The standard deviation for yuan estimates, a commonly used gauge of dispersion, fell to the lowest since a poll in September 2016, suggesting China's central bank will keep a tight leash on the currency amidst the U.S.-China trade spat.

But the yuan moves in the year ahead were expected to be largely dependent on how the dollar performs.

A similar poll last week predicted the U.S. dollar's dominance will fade soon, with any sudden change in expectations for the policies of central banks posing the biggest risk.

"The era of a strong dollar is close to the end. Although the recent upward momentum in the U.S. dollar may continue in the short-term, the dollar will remain week in the long-run as the ECB and the BOJ tighten their monetary policy," said Li Yishuang, FX analyst at China Securities in Beijing.

"So, we expect the yuan will strengthen slightly over the next 12 months."

First Published:Jun 13, 2018 10:16 AM IST