Rupee edges closer to 80: How will it impact the Indian economy & businesses

The inflation in the US continues to be persistently high, with the latest number touching a new 40-year high of 9.1% in June. The higher-than-expected inflation reading has upped the probability of a 100 bps rate hike in the coming FOMC meeting, to be held on July 26-27, from 0.2% to 33% in the futures market, further soaring the value of the dollar.

The DXY index has zoomed to 108, the highest since 2001-02. The Rupee hit an all-time low of 79.90, just Rs. 0.10 away from the psychological level of 80 and has already depreciated by 5% this fiscal year. With the elevated crude prices resulting in deterioration of trade deficit, widening interest rates differential between India and the US due to aggressive monetary tightening by Fed and unrelenting outflows by FPIs, the Rupee is expected to remain under pressure for some more time. In addition, a lower USD-INR forward premia has made carry trades less attractive for overseas investors, which can lead to the unwinding of these trades, thus depreciating the Rupee further.

What does it mean for the Indian economy?


While a weak currency will support the exports of the economy, it might not be the case this time.

The global economy is dabbling with the risk of falling into recession. The aggressive stance by central banks across the globe to tame inflation will eventually lead to a slowdown in discretionary consumption and hence subdued export demand. On top of it, India has raised export duties on steel and petroleum products and put a ban on the export of wheat and sugar.

If crude prices remain elevated due to supply chain constraints induced by the Russia-Ukraine war, the import bill will not come down enough to counter the fall in export earnings. This will deteriorate the trade deficit, thus widening the current account deficit. A weak Rupee will also increase the input cost of industries that depend heavily on the import of raw materials, thus fuelling inflation. In addition, it will increase the cost of raising dollar-denominated debt by businesses making private investments expensive.

The RBI has announced a slew of measures to cushion the Rupee’s fall. It has been intervening in the spot and forward market to contain the volatility in the currency. The interventions in the spot market have shaved off $52 bn from RBI’s forex buffers from $640 bn at the peak in October 2021 to $588 bn as of 1st July 2022. It has also announced policies aiming to attract foreign investments such as exempting foreign currency deposits from statutory reserve requirements, easing provisions for remittances, allowing more short-term foreign portfolio investments in government securities and raising investment limits for external commercial borrowings.

Recently, it announced an additional arrangement for invoicing, payment, and settlement of exports/imports in the Rupee to manage the balance of payments. While these steps are in the right direction, it is unlikely that these will have a significant impact on currency movement as there will be few takers for Indian bonds amid global turmoil.

In a nutshell, until the global macro conditions stabilize, Rupee is expected to depreciate against the dollar. However, RBI will continue to cushion the Rupee fall by intervening in forex markets to limit its effects on the economy.

(Ritika Chhabra is an economist at Prabhudas Lilladher)