The rupee broke the crucial level of 80 against the dollar. What has led to this steep fall and what are the factors dragging the currency down?
There are a host of factors that are actually dragging the Indian rupee. We have seen some cooling off in the dollar index but then the rupee is still continuing with its selling spree. It is majorly because we have seen again a strong advance in crude oil prices. The market was expecting that Saudi Arabia, which has a spare capacity of around 1.5 million barrels per day, might increase its production but then there are no hints on that and the US administration has been pressuring the OPEC producers to increase their output. Markets will now be eyeing the 3rd August meeting of the OPEC producers.
Since OPEC plus producers are not increasing their output we are again seeing a strong advance in crude oil prices and that has been the major reason why the rupee has been depreciating this week. There is strong demand from oil importers and they are actually hedging their risk so this is the primary reason the rupee has slipped beyond the 80 mark as well. Besides this obviously there have been concerns about the global monetary tightening condition.
We have seen close to $33 billion of outflows this year and this is also a major cause of concern. There are strong expectations that the current account deficit might increase to 2.9% to 3% of GDP so that is again a cause of concern and all of these factors in confluence are actually leading to a lot of selling pressure that is coming in the Indian rupee. But I think there is one ray of hope here, we have the ECB meeting which is lined up this week, and given the fact that we have already seen the euro and USD at parity last week, the euro has been able to find some cushion and parity and we have seen a rebound that is coming in euro.
Rupee at 80 per dollar! Here’s how it will impact you
“We do see some more pain for the domestic currency in the near term, but it is likely to remain cushioned by the 81 mark amid a host of factors. The long-term inflation expectations have fallen in the US, and concerns of super-sized tightening by the US Fed at the forthcoming meeting have eased, which is leading to a retreat in the dollar index from multi-year highs and aiding the local unit,” says Sugandha Sachdeva, Vice President – Commodity and Currency Research, at Religare Broking Ltd.
Markets are now expecting the ECB to actually hike interest rates at the forthcoming meeting. Given the fact that there are a lot of concerns about inflation in the eurozone which is almost at record highs of around 8.6% seen in June, Earlier, it was US Fed which was actually tightening very swiftly as compared to its peers but now if we see ECB also tightening, we may see dollar index coming under certain pressure and it might aid the Indian rupee to a certain extent. Besides this, we are seeing that RBI and the government have been taking a lot of steps to curb this fall in the rupee and we are seeing a lot of resilience along this 80 mark which is acting as physiological support for the Indian rupee.
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We feel there can be some more pain given the fact that there would be a lot of hedging demand for the rupee may be from oil importers and other corporates also who have unhedged currency risk in the market so that might take the Indian rupee slightly lower but I think the worst is behind us. We do see some more pain for the domestic currency in the near term, but it is likely to remain cushioned by the 81 mark amid a host of factors.
What does the rupee at 80 mean for our economy? How is it going to impact the common people of India?
Imports are actually becoming a lot costlier so a lot of sectors are getting impacted. A major dent would come in for students who plan to study abroad, normally the session starts in August-September and many students actually travel abroad for their overseas education. Many travelers are also going for vacations abroad so that is also going to hurt them so much. In terms of sectors also but then there are some benefits also, it is a boon also for certain sectors especially the agriculture produce, the IT and textile industry.
Leather and pharma would actually increase their forex earnings and one more silver lining here is that we are going to gain significantly in terms of tea exports. Sri Lanka used to be at the top position in terms of tea exports but then because of the economic crisis in Sri Lanka, we can certainly take advantage of that and we can certainly increase our exports, especially to Russia where we are not using dollars so it could be a rupee-denominated equation and there we can actually stand to gain. So there are certain sectors which tend to kind of witness a lot of losses because of the import quotient but then there are a lot of sectors which actually tend to gain especially IT, pharma, agriculture produce and all.
What has been the RBI response? What do you expect the RBI to do so as to cap the rupee depreciation?
RBI has been intervening in the market but RBI’s stance is not to actually look at the certain value for the rupee, they are in for stability in the rupee and they have been trying to curb excessive volatility in the rupee.
We are witnessing a lot of resilience around this 80 mark. RBI has been proactively intervening in the market and they will continue to intervene and they might expand their forex reserves. The government has also come out with recent measures like the rupee international trade mechanism so that will also certainly aid rupee as we spoke about last time that the government has recently increased the import duty on gold also. They have come out with levies on the export of oil products also so all of these are measures to curtail this volatility in the rupee and all of these variables will support the rupee.
The long-term inflation expectations have fallen in the US, and concerns of super-sized tightening by the US Fed at the forthcoming meeting have eased, which is leading to a retreat in the dollar index from multi-year highs and aiding the local unit. Besides, the US central bank might be forced to pause its rate hike cycle going forward given the concerns about recessionary risks and it seems that the worst is likely to be over soon. Secondly, the RBI and the government have recently taken several measures which might stem the fall in the rupee. The rupee-dollar exchange rate is expected to hover in the 78.50 to 81 band till September.
But what about this financial year? Do you think that the rupee could slip to 82 against the dollar in this financial year?
It is a possibility but I will have to discuss two variables here first when the Fed keeps hiking interest rates as a swift base to combat inflation. Secondly, if we see the energy prices worsening further. We are already seeing that Europe is grappling with the energy crisis and Russia has actually stopped flows of gas to certain countries in Europe so if that crisis escalates and crude oil prices continue to rise further with no increase in production from the OPEC countries in that scenario 82 is also a possibility if the energy crisis worsens further.
We would also want to see the dollar index holding above the 109.50 mark which is a very strong resistance area for the dollar index. So in case the dollar index manages to sustain above the 109.5 mark, we can see it heading towards the 111 to 112 mark as well. It seems slightly unlikely at the moment but if the energy crisis worsens and if the situation deteriorates, one may see a safe haven in the dollar.
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