August 10, 2022
Indian rupee weakens at fresh low amid global adversities

Two thousand rupee notes on display with the Indian flag in the background.

Manish Rajput | SOPA Images | LightRocket via Getty Images

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.

rising energy prices

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.

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.

Remittance remains flexible

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.”

the problem of losses

‘Taper Tantrum’

Can the rupee fall to 82 per dollar?

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