Indian rupee once again came under pressure on Monday, depreciating to over a two-year low of 67.09 ahead of the crucial meeting of the US central bank this week.
"The USD/INR pair has breached the crucial resistance of 66.85 which was the previous top. The trend for the pair remains bullish and we expect target of 67.40-80," said IFA Global in a note.
At its two-day meeting on 15-16 December, the US Federal Reserve is widely expected to raise interest rates for the first time since 2006, which could adversely impact emerging market currencies including India.
"The Federal Open Market Committee (FOMC) is widely expected to hike 25bp at this week's meeting. The focus now is on the rate hike path, as the market outlook remains divergent from FOMC projections. We expect a 25bp rate hike this week, followed by three hikes next year, bringing the target range for the fed funds rate to 1.00-1.25% by end-2016," said Barclays Capital in a note.
A rate hike by the US Fed at the meeting is likely to strengthen the US dollar further weighing down the rupee.
"The Fed's data-dependent policy stance suggests that the next round of USD appreciation may have to wait until another hike becomes warranted by future economic data. In case of a hawkish surprise, the EM and high-beta G10 currencies may be more vulnerable versus the USD," said the note.
However, a report by Deutsche Bank expects the rupee slide to be contained by the "proactive" stance of the Reserve Bank of India (RBI). The bank forecasts the domestic currency to trade between 66 and 68 against the US dollar in the next 12-18 months.
"Indeed, the Reserve Bank of India (RBI) has enough FX (forex) reserves in its coffer, $353 bn or about 9-10 months of import cover, to intervene decisively in the FX market, if need arises," the bank said.
The rupee could face risks from a devaluation of Chinese yuan and it may depreciate to the 68-70 range in such a scenario, it added.