Rupee outperformance to come under pressure: Edelweiss

New Delhi: The fundamental pressure on USD/INR is on upside and the pair is heading towards a level of 72-73 by December-end this year, says an Edelweiss Securities report.

According to the Edelweiss Forex rates annual currency outlook 2017, the outperformance of the rupee is unlikely to continue and US weak dollar policy can create some downside pressure on USD/INR in the near term.

"While in the near-term, US weak Dollar policy can create some downside pressure on USD/INR, we believe that fundamental pressure on USD/INR remains on upside and we see USD/INR heading towards level of 72-73," Edelweiss Securities said in a research note.

The report noted that INR will not be able to escape global USD rally and receding Dollar liquidity.

"While we remain optimistic on India's growth story and macro fundamentals; we believe that INR over-valuation, rising commodity prices and growing protectionism amidst weakness in exports is likely to put pressure on INR," the report said.

The Indian rupee has been one of the best performing emerging market currency in the last few years resulting in significant outperformance of around 15 per cent against emerging market basket and about 12 per cent in REER terms in the last three years.

"This was on the back of fortuitous circumstances of decline in commodity prices resulting in lower imports and healthy capital inflows post Modi victory amidst benign global liquidity," the report said.

However, the relative appreciation of the rupee is taking a toll through weak exports with India's underperformance in global exports.

Moreover, some deterioration in both the current and capital account in 2017 is also likely, the note said.

"With half of the term of PM Modi over, investors would be bracing for a risk of gradual move towards populism, especially on the wake of demonetisation and state elections," the report said.

It further said that "strong surge in capital inflows post-Modi election euphoria was a key reason for the outperformance in INR. The recent weakness in capital flows amidst souring of sentiments towards emerging markets is a source of weakness for the currency".

The rupee is currently hovering at 66.95 against the US dollar.