Indian rupee weakens at fresh low amid global adversities

Analysts say the currency will continue to depreciate in the coming months, with the Indian rupee coming under heavy selling pressure due to global unfavorable conditions.

In recent weeks, Indian currency It tested record levels at least twice in July and breached the Rs 80 per US dollar level, recovering only after the Reserve Bank of India (RBI) took steps to halt the slide.

The currency has since lost some ground and was at 79.06 near the dollar on Thursday.

The recent sharp fall prompted a swift response from policymakers to allay concerns about a sell-off in the rupee, which could push prices even lower.

Finance Minister Nirmala Sitharaman blames external factors for rupee’s devaluationIn a written statement to Parliament at the end of July.

He said global factors such as the ongoing Russo-Ukraine war, rising crude oil prices and tightening global financial conditions are among the main reasons for the weakening of the Indian rupee against the dollar.

Analysts agreed that the currency is being affected by multiple fronts globally.

India’s exposure to higher energy prices has had an impact on the currency, with the rupee falling more than 5% against the dollar year-on-year.

Rising energy prices are particularly challenging for India – the world’s third largest oil importer – which usually buys oil in dollars. When the rupee weakens, its oil purchases become more expensive.

According to analysts at Nomura, for every $1 increase in the price of oil, India’s import bill increases by $2.1 billion.

Industry observers say there has been a “significant increase” in Russian oil deliveries to India since March after Russia began its invasion of Ukraine – and New Delhi is set to buy even cheaper oil from Moscow.

According to investment advisory firm Again Capital, early June data showed Russian crude oil supplies to India rose to nearly 1 million barrels per day from 800,000 barrels per day in May.

“Typically, a weak currency acts as a pressure valve to restore external stability by making exports more competitive and reducing demand for imports,” said Adarsh ​​Sinha, co-head of Bank of Asia-Pacific Forex and Rates Strategy. Is.” America Securities.

He told CNBC, “Oil imports from Russia, if settled in rupees, will reduce dollar demand from oil importers. These rupees can be used to pay for Indian exports, and/or investments in India. can be done – both can be beneficial.”

In July, India’s central bank set up a mechanism for International Trade Agreement in Indian Rupee, The measure allows traders to bill, pay and settle imports and exports using the Indian rupee, which will help in the long-term goal of internationalization of the Indian currency, analysts said.

“This move is constructive as higher INR to rupee in the medium term [Indian rupees] Settlement demand implies less demand for foreign exchange for current account transactions,” Radhika Rao, Senior Vice President and Economist, DBS Bank said Recent note.

It will “facilitate trade with neighboring countries, with trading partners who are unable to access dollar funds and/are temporarily out of the international trading system and who wish to broaden their pool of trade settlement currencies, ” She wrote.

While a weak rupee puts pressure on India’s imports from other countries, it can help boost the country’s remittances from abroad.

Based on recoveries in the United States, remittance flows to India grew by 8% to $89.4 billion in 2021, accounting for one-fifth of the country’s remittances, According to World Bank data.

“Remittance can be determined by many factors but [a] A weaker rupee helps increase the home value of those remittances which will help offset inflationary pressures for recipients,” said Sinha of BofA Securities.

Goldman Sachs also said in a recent note dispatch to India, “Middle East should remain resilient on the back of stable economic growth, benefiting from higher oil prices.”

Still, India’s rising current account deficit is expected to remain under pressure for the rupee, exacerbated by ongoing large capital outflows, analysts cautioned.

“India’s external balance is deteriorating, driven by trade terms shocks from rising commodity prices, resulting in a widening current account deficit,” said Shantanu Sengupta, India economist at Goldman Sachs.

A current account deficit occurs when a country’s imports exceed its exports.

In a market environment that is not conducive to emerging market portfolio flows, “we anticipate a large balance of payments deficit. This means FX reserves in the spot and forward books held by the RBI continue to decline.”

According to a recent note by Nomura, Indian equities have experienced net foreign outflows of $28.9 billion so far in July, the second highest among Asian economies excluding Japan.

But India’s large external buffers have “provided confidence in the ability of the Reserve Bank of India to prevent tail risk scenarios from spreading to domestic interest rates and further sway growth when it is already dealing with higher commodity prices.” Is going through a rough patch due to disruption in prices and supply, as well as tight monetary policy,” Sinha said.

“Our estimate of the balance of payments deficit this year indicates a shortfall of US$ 30-50 billion. RBI has sufficient reserves to sustain intervention for at least one more year,” he said.

In an effort to protect the rupee, the central bank recently announced a series of measures aimed at stimulating capital flows. The measures include easing of norms on foreign deposits, foreign investment flows into the debt market and easing of norms for external commercial borrowings.

Analysts citing better fundamentals this time around said that despite the current poor performance of the rupee, the currency’s depreciation is still greater today than it was in 2013’s “taper tantrum”.

At the time, the Federal Reserve’s decision to reduce its extraordinary monetary stimulus triggered a selloff in bonds, which increased Treasury yields and strengthened the US dollar. This led to an exodus of funds from emerging markets.

“mostly [the Indian rupee’s] Depreciation pressure stems from sharp gains in the US dollar as the latter benefits from wider rate and policy gaps,” DBS’s Rao said in a recent note, explaining the higher interest rate differential between the greenback and the rupee in the US. Interest rates continue to rise.

He said the pressure to hedge the rupee’s depreciation is not as high as during the taper tantrum. If pressure mounts, the government has options such as suspending purchases of heavy defense items that will help reduce demand for the dollar, she wrote.

Analysts also argued that India’s external balance, often cited as a source of vulnerability, has some inherent buffer against rupee depreciation risks.

“So far, despite the deteriorating external balance, the stock of foreign exchange reserves was limiting the vulnerability of India’s external sector, and has allowed for a slower depreciation of the INR (vs USD),” said Sengupta of Goldman Sachs.

“Going forward, as FX reserves are depleted, and the real rate differential narrows, India’s external vulnerability risks will increase – although they will compare better to a ‘taper tantrum’.”

Analysts said as global conditions continue to remain volatile, there will be a risk of further depreciation in the rupee in the coming months.

Sengupta of Goldman Sachs said, “With global capital flows drying up in the Fed tightening cycle, US recession risks unfolding, and India’s external balance becoming challenging, we may see continued weakness in INR going forward. can.”

As a result, the bank estimates that the Indian currency could be around Rs 80-81 per dollar in the next 3 to 6 months, “risks are tilted towards further weakness in case of more intense dollar strength,” he said.

Other analysts also expect the rupee to test new lows in the near future.

Craig Chan, Nomura’s head of global FX strategy, said he does not believe the “80 level is sacred.”

Referring to the “taper tantrum” period, he said, “We do not believe there is any specific market positioning factor that should lead to a bullish move in USD/INR upon breaking 80 – unlike in 2013.” “Our last call was INR . [rupee] The risk of breaking the $80 level and reaching 82 by the end of August.”

Sinha of BofA Securities also expects the Indian currency to reach the level of 82 by the end of 2022 due to continued volatility in the global environment.

“However, we see the risk of large depreciation implied by RBI’s substantial reserves buffer,” he said.