Indian rupee to stagnate on dollar rally; yuan to rise slowly - Reuters Poll

By Sumanta Dey

BANGALORE (Reuters) - The Indian rupee will likely stagnate over the next year as a U.S. dollar rally gathers steam and the Indian economy at best chugs along, while the Chinese yuan will probably appreciate a little, a Reuters poll found.

The poll of more than 30 currency strategists, conducted this week, predicted one U.S. dollar will fetch 60.50 rupees in a month, 60.30 rupees in six months and 60.82 rupees in a year. The dollar was trading around 60.43 on Friday.

Those predictions are a little more bearish than those in the August survey and come despite the rupee rising over 2 percent and the stock market rallying 28 percent since the start of this year.

"India enjoyed a steady stream of bond inflows in August, almost bursting the foreign investment limit of $25 billion (15.32 billion pounds)," said Sook Mei Leong, ASEAN head of market research at BTMU in Singapore.

The European Central Bank on Thursday launched a stimulus programme to buy asset-backed securities and covered bonds in the latest attempt to revive the flagging euro zone economy and boost inflation.

Past experience shows that much of this money may eventually flow into emerging markets that offer a better return than the sub one percent yield of benchmark German bunds .

But with rising treasury yields in the U.S., inflows into Indian markets could be smaller this time around as investors flock to America's bond markets.

"Looking ahead towards year-end, portfolio inflows may taper especially with U.S. monetary accommodation ending soon, though it is unlikely to be as negative as that seen last year," Leong added.

From a year earlier, the Indian economy grew 5.7 percent in the quarter ended June, a 2-1/2 year high, breaking above a dominant sub-five percent trend seen in the past two years.

Still, unmet lofty expectations of reforms from the new government have tempered the jubilant optimism that followed Prime Minister Narendra Modi's election victory in May.

While economists are still hopeful the economy is gaining momentum, they agree it would take longer than earlier expected to return to near double-digit growth rate.

Also tempering the rupee's prospects is the U.S. dollar, as a long-anticipated rally is finally taking hold.

The dollar <.DXY>, as measured against a basket of currencies, has gained almost 5 percent since the start of the year on expectations the Federal Reserve will end its stimulus next month. Economists polled by Reuters expect the first rate hike in Q2 2015.

YUAN TO STRENGTHEN

China's yuan is expected to slowly strengthen over the next 12 months after a sharp slide early this year, as markets expect the country's central bank to be comfortable with a stronger currency as the economy recovers.

According to the Reuters poll, the currency is expected to change hands at 6.15 yuan a U.S. dollar in one month, then 6.12 yuan in six months and 6.06 yuan in a year.

On Friday, the People's Bank of China set the midpoint rate at 6.1707 per dollar, down 0.07 percent from the previous fix, reflecting the sharp rise of the U.S. index on Thursday <.DXY>.

The spot rate was around 6.14 to the dollar on Friday. The yuan is allowed to trade 2 percent above or below the daily midpoint.

Recent data from China has sent conflicting signs about the health of the economy.

The economy grew at a faster pace in the April-June quarter, while purchasing manager surveys showed factory activity pulled back sharply in August.

"In many ways, the Chinese currency appears to be trading in its own little world, separated from economics even though many questions linger," said Leong of BTMU. "Perhaps the main worry is over the property sector."

Trade data for August, due on Monday, should throw some light on the health of exports although economists expect a slight moderation in the trade surplus to $40 billion, down from July's $47.3 billion.

(Additional reporting by Shaloo Shrivastava; Editing by Richard Borsuk)