India’s rupee continues to slide against the US dollar. The rupee declined 42 paise to close at 79.37 to the USD on Tuesday, weighed by worries of rising current account deficit, continued selling by foreign institutional investors and strengthening dollar index.
“Higher crude oil price followed by inflationary concerns, global recession talks, and continued foreign institutional investors (FII) selling in the domestic market pushed the rupee to its lifetime low,”noted Rahul Kalantri, VP commodities, Mehta Equities.
Most Asian and emerging market currencies have depreciated 6-9 per cent against the dollar. As the US Federal Reserve continues to raise interest rates amid a surge in inflation, there has been a huge FII outflow from emerging markets, including India. The dollar index, which measures the strength of the greenback against a basket of six currencies, rose almost 1 per cent on Tuesday to around 106.
So far in 2022, foreign portfolio investors have sold Rs 2.34 lakh crore from India’s equity and debt markets. India imports over 80 per cent of its crude oil requirements. With prices remaining above $105 a barrel for six months now, a stronger dollar will mean we pay more for the imported crude and this will put further pressure on the rupee, leading to worsening current account deficit.
“Our trade deficit has gone up to $25 billion, which is about $10 billion per month higher than 1.5 years ago. This will affect our current account deficit and balance of payments, which were positive a year ago to a large extent,” pointed Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors.
The Reserve Bank of India has tried to shore up the rupee over the last few months by constantly selling dollars—the forex reserves have declined to $593 billion from its all-time high of $642 billion in September. While it may have slowed the pace, the rupee has continued to decline. The RBI has also raised interest rates by 90 basis points over May and June to tame inflation, and more rate hikes are expected in the coming months. But, it will also be vary of the impact that may have on India’s economic growth and therefore it may not be too aggressive on that front.
Bhansali expects that the RBI will continue to sell dollars, but unless FII inflows revive, the rupee may remain weak. He feels the rupee could touch 80.50 to a dollar by December.
Kalantri of Mehta Equities is even more bearish and feels the rupee could even touch the 83.50 level by the year end.
“We don’t think that the RBI has much room to cap rupee weakness. However, improved performance of the service sector and record collections of goods and services tax (GST) would give some nominal breathing support for the rupee,” he said.
Last week, the government announced higher tax on export of petrol, diesel and aviation turbine fuel in order to ensure enough domestic supply and to check windfall gains made by domestic crude producers. Analysts say these are unlikely to improve the current account, but will moderate oil exports. That coupled with steady domestic demand and a global growth slowdown, means the current account deficit is likely to deteriorate.
Sonal Varma, chief India economist at Nomura Securities, expects India’s current account deficit to rise to 3.3 per cent of GDP in the current financial year ending March 2023, compared with 1.2 per cent last year.
“We expect India’s widening current account deficit to remain an ongoing drag for rupee, with limited offsets from India’s FDI and other investment inflows, exacerbated by ongoing FPI outflows,” said Varma.
The weakening balance of payment dynamics, aggressive interest rate hikes by the Federal Reserve and rising risks of recession in the US, should drive rupee weakness in the coming months, said Varma, who expects the rupee to touch 82 by the third quarter of this year and 81 by the December quarter.
