The Indian rupee could fall to 82 to a dollar in the near-term due to widening trade deficit and aggressive rate hike expected by the US Federal Reserve later this week to ease record high inflation, economists said.
There is widespread speculation that the US Fed may hike interest rate by 50-75 basis points in its July 26-27 meeting, which could result in capital flight from emerging countries like India. With dollar outflows and higher levels of crude oil prices, the rupee will see further depreciation.
The rupee had hit the lowest level of $80.06 per dollar last week.
Economists expect the rupee to trade at $78 a dollar after touching a life low by March next year, with stable crude oil prices and prospects of an improvement in the geopolitical situation.
“Overall we had assessed that the rupee may stabilize around $79 a dollar. This would be the average price for the whole year… In the current depreciation cycle, the rupee could currently fall by over 81/USD. Political situation,” Sunil Kumar Sinha, principal economist at India Ratings and Research told PTI.
Amid a rebound in crude oil prices and expectations that the US dollar will remain relatively strong in the immediate term, ICRA expects the rupee to weaken to USD 81/USD in Q2 of FY2023.
“Later, global sentiment and the direction of foreign portfolio investment (FPI) inflows will determine whether the Indian rupee continues to depreciate for the rest of the year or whether the US recession fears will ultimately deter the dollar’s strength,” said Aditi Nair, chief economist, ICRA. Is.” ,
According to Nomura, the rupee is likely to witness a level of 82 during the July-September quarter, given the dynamics of India’s BoP and several headwinds including Fed hikes during the year.
CRISIL expects the rupee to remain under pressure in the near term and the rupee-dollar exchange rate volatile with a depreciation bias in the near term on account of widening of the trade deficit, FPI outflows and strengthening of the US dollar index. Safe-haven demand for dollar amid US Fed rate hike and geopolitical risks.
“However, the pressure may ease towards the end of the fiscal year, as crude oil prices are expected to ease, and the Fed has slowed its rate hikes. Therefore, we expect the exchange rate to be 78/$ by March 2023. , with much higher volatility between now and then,” said Deepti Deshpande, Principal Economist, Crisil, as compared to $76.2/$ in March 2022.
The trade deficit widened to a record $26.18 billion in June due to expensive imports of crude oil, coal and gold. In the current fiscal, the deficit widened to $70.80 billion in April-June.
Last week, RBI Governor Shaktikanta Das said that the central bank does not have any specific level of rupee in mind, but wants to ensure its orderly growth and emphasized zero tolerance for volatile and bumpy movements of rupee against the dollar. .
The governor had also indicated that the central bank would use foreign exchange reserves, if necessary, to deal with currency volatility.
“After all, this is the purpose for which we accumulated reserves when capital flows were strong. And, might I add, you buy an umbrella to use when it rains!” Mr Das said.
The country’s foreign exchange reserves declined by $ 7.541 billion to $ 572.712 billion in the week ended July 15.
On further interventions by the government and RBI to contain the rupee depreciation, EY India’s chief policy advisor DK Srivastava said the Center may temporarily reduce customs duty and excise duty on select products.
At the same time, he said, India can take a more aggressive approach towards internationalization of the Indian rupee so that it can be used as a reliable currency for trade and a currency that many developing countries use as foreign exchange reserves. can keep in