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Can looming Fed hike result in… a US dollar correction?

Indranil Sengupta, India Chief Economist, Bank of America-Merrill Lynch, says the rupee could appreciate to 65 levels versus the dollar by March 2016.

Even as analysts fret over what is expected to be the first Federal Reserve interest rate hike tomorrow in the longest time, and try to foretell is impact on emerging markets currencies, one economist is not unduly worried and says it is the US dollar that may come under pressure when it comes through.

Given that backrop, Indranil Sengupta, India Chief Economist, Bank of America-Merrill Lynch, says the rupee could appreciate to 65 levels versus the dollar by March 2016.

“Inflows into India had dried up because of the Bihar elections, the impending Fed rate hike and a delay in earnings turnaround,” he told CNBC-TV18. “With Fed out of the way and earnings expected to turn around, as well as thanks to an increase in the FPI G-sec investment limit from January 1, the rupee can appreciate.”

Sengupta said he believes the US dollar is overvalued by 15-20 percent versus the euro, and that its fair value is somewhere around 120-130 versus the common currency.

For the rupee, he maintained its fair value was somewhere between 55-65 versus the greenback, adding that it would result in strength for the Indian currency. “The rupee has support of valuations,” he said.

What are the risks to Sengupta’s bold call? If the dollar witnesses a major appreciation next year on account of a tighter-than-expected Fed monetary policy.

“The market is pricing in two Fed hikes next year. [The dollar could appreciate if there are more],” he said.

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