This morning the Indian National Rupee (INR) breached the 80 mark versus the US dollar. The pressure on the Indian rupee will continue to increase as crude oil prices have gone up again and there is also a possibility of an impending US Fed interest rate increase. Moreover, geopolitical conditions aside, there has been relentless selling by foreign investors, and a rise in demand for the US dollar due to its safe haven status. All these factors may further depreciate the Indian currency. Multiple experts with whom THE WEEK spoke are of the view that the rupee-dollar exchange rate will continue to remain volatile. Some have even stated that it may further depreciate and reach a level of 82 to 83 in the near term.
“The Indian rupee has lost 7 per cent from the start of 2022. It has remained relatively stable though, compared with past crises [eg Taper Tantrum 2013, Global Financial Crisis 2008], since external vulnerability remains relatively low [read relatively high import cover and low external debt]. The RBI, too, has stepped in via forex market interventions to manage volatility, but at the cost of forex reserves going down. The rupee is also not singularly weakening against the dollar. It has shown resilience compared with the currencies of some of the other emerging economies. Though India is less vulnerable to external shocks now, the shocks this time are much bigger with the Fed on an aggressive rate hike path amid escalating geopolitical tensions,” remarked Dipti Deshpande, Principal Economist, CRISIL Ltd.
She says that the rupee is expected to be under pressure in the near term. “The rupee-dollar exchange rate will remain volatile with depreciation bias in the near term due to widening of the trade deficit, FPI outflows, and strengthening of the US dollar index (owing to rate hikes by the US Fed and safe-haven demand for the dollar amid geopolitical risks). However, the pressure may ease towards the end of the fiscal, as crude oil prices are expected to come down, and the Fed slows its rate hike spree. Hence, we expect the exchange rate to settle to 78 to a dollar by March 2023, compared with 76.2 to the dollar in March 2022, with a lot of volatility thrown in between now and then,” added Deshpande.
The dollar index extended its fall and slipped below 107.40 marks after Euro gained and traded above parity with the US Dollar. The European Central Bank (ECB) regular policy meeting is scheduled for this coming Thursday and the market is assuming that they will raise interest rates for the first time in 11 years.
“The rupee was unable to hold its gains and slipped again despite profit taking in the dollar index. Crude oil prices jumped again and restricted gains of the rupee. We expect the rupee to remain volatile in the coming days ahead of the ECB meeting this week and the US Fed meeting next week. We believe rupee could hold its key support level of 80.55 on a closing basis and if rupee breaches this level then we might see rupee getting weaker till 81.70 and 82.30 level,” pointed out Rahul Kalantri, VP Commodities, Mehta Equities Ltd.
Most experts feel that the Fed may raise rates that could further trigger a deprecation in the Indian Rupee. “Expectation is that the Fed could raise rates by another 75bps and maintain a hawkish stance. On the domestic front, the trade deficit continued to widen and that also is weighing on the rupee. We expect the US dollar-INR (Spot) to trade with a positive bias and quote in the range of 79.70 and 80.20,” said Gaurang Somaiya, Forex and Bullion Analyst, Motilal Oswal Financial Services Ltd.
Experts feel that if energy (crude oil and natural gas) prices rise further, it can have a multiplier effect on inflation. Even if power tariffs rise in India that can have an inflationary impact as well and could very well affect the Indian currency. “In case the INR was to appreciate it can test the 78.20 level in an optimistic scenario. On the flip side, the worst-case scenario indicates a potential rise up to 83.50. These are targets over the next two-three quarters,” pointed out Vijay Bhambwani, Head of Research Behavioral Technical analysis at Equitymaster.
Market analysts point out that external factors aside, even the domestic factors do not imply that the rupee at these record lows may be effectively sustained. The outlook for the rupee bulls is hazy due to the rise in crude oil price, a strong dollar abroad, and ongoing outflows of foreign capital from capital markets are the key causes of the rupee's decline. That said the outlook for global economic activity has been clouded by high inflation, protracted Covid-19 lockdowns in China, the monetary tightening campaign of the major central banks, and supply chain disruptions brought on by the Russia-Ukraine war, which have caused the rupee to depreciate sharply against the dollar by over 7.5 per cent so far this year.
“We anticipate that the rupee's decline may continue from this point forward and may soon be above Rs 80 to the dollar level. However, looking at the bigger picture, despite its recent decline, the Indian Rupee continues to be one of the best-performing emerging market currencies. According to data analysed by DBS as of June 17, the rupee was the seventh 'best performer' out of the 19 currencies that lost value relative to the US dollar. Since October 2021, FIIs have sold almost Rs 3 lakh crore of Indian equity, but the rupee has held steady due to the high forex reserves, which will give the RBI enough ammunition to intervene. Furthermore, the global rate increases will lower the cost of major commodities, and the return to normalcy of supply chains will stop inflation from rising further. This will limit the rupee's future decline, and we anticipate RBI intervention if the rupee falls too far. One big issue with global interest rate increase is going to increase pressure on RBI to increase domestic interest rates also,” remarked Rohit Arora, CEO and Co-Founder, Biz2Credit & Biz2X.
Experts do point out that RBI will take steps to contain the steady fall of the Indian currency shortly. “The rupee has finally breached the 80 mark, a key psychological level. The rupee is expected to further slide due to the current severe rate hike by the US Fed, relentless selling by foreign investors, and the rising demand for the US dollar. The RBI is aware of the falling rupee quagmire and could take actions to curb the further depreciation, thus we expect further downside to 81 to 81.5 levels,” said Punit Patni, Equity Research Analyst, Swastika Investmart Ltd.
The US Fed hiking rates aggressively led to the dollar strengthening, and subsequently, FPIs pulled out funds from the Indian equity markets. FPIs have pulled out a record Rs 2.25 lakh crores from the Indian market in 2022. Many experts agree that rupee depreciation was expected. “The INR depreciation is on expected lines, though it has depreciated nearly 25 per cent since 2014 the fall has been moderate if compared to other Asian currencies. A dollar strengthening leads to a weakening of other currencies as witnessed in 2020 and 2013. In fact, some of the major currencies like GBP, Euro, and Yen have depreciated more than the INR,” pointed out Nish Bhatt, Founder and CEO, Millwood Kane International-an Investment consulting firm.
