Rupee risk drops further to 82 against the dollar in the near term: experts
Economists said the Indian rupee could fall further to $82 in the near term due to a widening trade deficit and expect a rate hike by the US Federal Reserve later this week to tame record high inflation.
There is widespread speculation that the US Federal Reserve at its July 26-27 meeting may raise interest rates by 50-75 basis points, which could lead to capital flight from emerging countries like India. With the influx of the dollar and the rise in the level of crude oil prices, the rupee will witness further depreciation.
Last week, the rupee fell to a lifetime low of 80.06 per dollar.
Economists see that the rupee, after touching its lowest level in life, may stabilize around 78 against the dollar by March of next year with stability around crude oil prices and a possible improvement in the geopolitical situation.
“Overall, what we have assessed is that the rupee could stabilize somewhere around 79 to the dollar. This would be the average rate for the full year… In the current declining cycle, the rupee could drop to more than 81/USD at a time. Current Sunil Kumar Sinha, chief economist at India Ratings & Research, told PTI.
Amid the recovery in crude oil prices and expectations that the US dollar will remain relatively strong in the near term, the ICRA forecasts that the rupee could weaken to 81/USD in the second quarter of fiscal year 2023.
After that, global sentiment and the direction of foreign portfolio investment (FPI) inflows will determine whether the Indian rupee continues to decline for the remainder of the year, or if US recession fears will eventually halt the dollar’s strength, said Aditi Nayar, chief economist at ICRA. .
According to Nomura, the rupee could see a level of 82 during the July-September quarter due to multiple headwinds including weak balance of payments dynamics in India and Fed hike during the year.
CRISIL expects the rupee to come under pressure in the near term and the exchange rate of the rupee against the dollar will remain volatile with a depreciation bias in the near term due to widening trade deficit, FPI outflows and strengthening of the US dollar index due to the US Federal Reserve raising interest rates and demand for safe haven on the dollar amid risks geopolitics.
“However, the pressure may ease towards the end of the fiscal year, as crude oil prices are expected to decline and the Fed slows its rate hike. Thus, we expect the exchange rate to stabilize to $78/$ by March 2023, compared to $76.2/ In March 2022, with quite a bit of fluctuation every now and then.”
The trade deficit ballooned to a record $26.18 billion in June due to imports of more expensive crude oil, coal and gold. The deficit widened to $70.80 billion in April-June this fiscal year.
Last week, Reserve Bank of India Governor Shaktikanta Das said the central bank did not have a certain level of rupee in mind, but wanted to ensure its orderly development and stressed zero tolerance for the volatile and bumpy moves of the Indian rupee against the dollar.
The governor also noted that the central bank will use foreign exchange reserves when needed to deal with currency fluctuations.
“After all, this is the very purpose for which we collected reserves when capital inflows were strong. And I might add, you can buy an umbrella to use when it rains!” Das said.
The country’s foreign exchange reserves fell by $7.541 billion to $572.712 billion in the week ended July 15.
On further intervention from the government and the Reserve Bank of India to stem the decline in the rupee, India’s chief policy advisor, DK Srivastava, said the center may temporarily reduce customs and production duties on select products.
He also said, India can take a more aggressive approach towards the internationalization of the Indian rupee so that it can be used as a reliable currency for trade and as a currency that many developing countries can hold as foreign exchange reserves.