Rupee likely to depreciate further, raises concerns of Centre and RBI
- EconomyNews
- August 25, 2022
The Indian currency could weaken to 80 to the dollar over the next few weeks, according to a senior official, despite RBI’s intervention to support the rupee.
The rupee has been slipping to new record lows since Russia’s invasion of Ukraine in late February as worries around high crude oil and commodities prices, a strong dollar, and weakening economic growth are prompting money managers to unload assets that underperform during periods of slow global growth. A weaker rupee also encourages inflation as India imports nearly 85% of its oil requirements.
While the central bank has failed to check the rupee’s slide, it has followed a policy of intermittent interventions through state-run banks in the forex markets to slow down the pace of depreciation. However, while it will continue to stagger the pace of depreciation, the RBI may not resist the slide to the level of rupees-80-to-a-dollar.
At its off-cycle meeting on 4 May, the RBI’s monetary policy committee raised the repo rate by 40 basis points, hours ahead of the anticipated Fed rate hike of 50 basis points (bps). Had the RBI not increased its policy rate, the interest rate differential between the US and India would have widened, accelerating the pace at which foreign portfolio investors are pulling out of India—they have pulled out $20.5 billion from India since Russia invaded Ukraine— accelerating the rupee’s fall.
The interest rate differential is wider despite the 4 May hike, as while the Fed hiked its policy rate further by 75 bps on 15 June to tame decades-high inflation in the US, the RBI increased its policy rate on 8 June by 50 bps. More Fed hikes are expected in the coming weeks, which is likely to add pressure on the RBI’s MPC to go for more aggressive rate hikes to narrow the gap.
RBI and the government are concerned about the fallout of the rupee’s depreciation. Imported inflation will sustain, given India depends on imports for more than two-thirds of its oil requirements. Another worry is the current account deficit, or CAD, which is projected to widen this year to 3% of GDP, a level considered unsustainable for India. If crude prices climb to $120 a barrel and above, as some estimates suggest, the deficit may widen further. India’s oil consumption isn’t price-sensitive and may not adjust to rising costs, the official added.
RBI and the government are concerned about the fallout of the rupee’s depreciation. Imported inflation will sustain, given India depends on imports for more than two-thirds of its oil requirements. Another worry is the current account deficit, or CAD, which is projected to widen this year to 3% of GDP, a level considered unsustainable for India. If crude prices climb to $120 a barrel and above, as some estimates suggest, the deficit may widen further. India’s oil consumption isn’t price-sensitive and may not adjust to rising costs, the official added.