By Indradip Ghosh and Tushar Goenka
BENGALURU (Reuters) - India's rupee will recoup this year's losses against the dollar over the coming 12 months, according to market strategists polled by Reuters, who said the issuance of sovereign bonds in foreign currencies may help prop it up.
Rising political risk after India revoked the special status of Kashmir - the Himalayan region that has long been a flashpoint in relations with Pakistan - knocked the rupee on Tuesday, pushing it to a 5-month low of near 71 per dollar.
Emerging market currencies tumbled on Monday following an escalation in the U.S.-China trade war, with the Chinese authorities allowing the yuan to weaken to above 7 per dollar for the first time in over a decade. The rupee fell 1.6%, its biggest drop since early December.
While those developments point to near-term weakness for the Indian rupee, the August 5-6 poll of over 40 strategists predicts those concerns will be short-lived, and the currency will regain lost ground over the coming year.
The rupee is forecast to gain nearly 2% to trade at 69.60 per dollar in a year from Monday's low of 70.82. That marks the most optimistic 12-month outlook for the currency since August 2018 but depends heavily on improvement in U.S.-China relations, which have only just taken a turn for the worse.
"In the second half of the year, what we are looking for is some sort of positive news on the U.S.-China trade war and maybe a little bit more (rupee) gains if the sovereign bonds issuance comes through," said Sakshi Gupta, senior Treasury economist at HDFC Bank.
Nearly three-quarters of 26 contributors who answered an additional question said the Indian government's recent decision to issue sovereign debt in foreign currencies, if implemented, would support the rupee.
But not everyone was convinced, as a lack of clarity on the timing and volume of the programme restricted respondents from gauging the magnitude of its effect.
"Short-term impact may be positive, albeit contingent on the amount of issuance planned. However, the longer-term impact is likely to be negative," said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.
"Given the persistent high fiscal deficits, India runs the risk of leaning heavily on hard currency issuances as an escape mechanism just like it has on off-budget financing vehicles and the risks may thus build up over time."
Over a third of common contributors from last month now forecast a more pessimistic outlook for the rupee.
"We were looking for the rupee to head towards 71 in the coming months, but we reckon the movement towards that level looks likely to be way quicker than expected as most wild cards appear to have played collective spoilsports," said Madhavi Arora, lead economist for FX and rates at Edelweiss Securities.
That sentiment was reflected in the Foreign Portfolio Investors' (FPI) data that showed investors have turned net sellers of Indian securities last month and this, after being net buyers since February until the July 5 budget.
What is also not helping the rupee is clear signs the Indian economy is slowing significantly.
That, coupled with inflation still well below the Reserve Bank of India's medium-term target of 4%, means the central bank was expected to cut rates for the fourth consecutive time on Wednesday.
"Historically, rate cuts have been supportive of the rupee," said Rini Sen, India economist at ANZ. "However, this has not held up in the last three rate cuts following which the rupee actually depreciated. This clearly indicates that risks to growth have become prominent to investor sentiment."
(Polling by Khushboo Mittal and Anisha Sheth; Editing by Ross Finley and Frances Kerry)