Indian rupee weakens, hits new low amid global turbulence

The two thousand rupee note is displayed with an Indian flag on the background.

Manish Rajput | SOPA images | LightRocket via Getty Images

The Indian Rupees has been under intense selling pressure due to a perfect storm of global storms that analysts say will continue to affect the coin in the coming months.

In recent weeks, the Indian currency tested record lows and broke 80 rupees per US dollar at least twice in July, only to recover after the Reserve Bank of India (RBI) stepped in to stem the slide.

The coin has regained some ground and is at around 79.06 against the dollar on Thursday.

The recent sharp drop has prompted policymakers to react quickly to assuage concerns about a sell-off in the rupee, which could send prices even lower.

Finance Minister Nirmala Sitharaman attributed the depreciation of the rupee to external reasonsin a written statement to parliament at the end of July.

Global factors such as the ongoing Russia-Ukraine war, soaring crude oil prices and tightening global financial conditions are among the main reasons for the Indian rupee’s weakness against the dollar, she said. speak.

Analysts agree that currencies are being picked from multiple sides around the globe.

Energy prices soar

India’s exposure to high energy prices has had a direct impact on the currency, with the rupee down more than 5% against the dollar year-to-date.

Rising energy prices are especially challenging for India – the world’s third-largest oil importer – which often buys oil in dollars. As the rupee weakens, it becomes more expensive to buy oil in the country.

According to Nomura analysts, for every $1 increase According to oil price, India’s import bill increased by 2.1 billion USD.

There has been a “significant increase” in Russian oil deliveries Industry observers say it will be tied to India from March after Russia’s invasion of Ukraine begins – and New Delhi looks set to buy even cheaper oil from Moscow, industry observers said. said.

Early June data showed India’s Russian crude oil supply approaching 1 million bpd, up from 800,000 bpd in May, according to investment advisory firm Again Capital.

“Typically, a weaker currency acts as a pressure valve to restore external stability by means of external stability,” said Adarsh ​​Sinha, co-head of rate and rate strategy for Asia Pacific. by making exports more competitive and reducing the need for imports by making them more expensive. US Securities.

“Importing oil from Russia, if paid in rupees, would reduce the demand for dollars from oil importers,” he told CNBC.

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In July, India’s central bank introduced a mechanism to international trade settlements in Indian rupees. The measure allows merchants to invoice, pay and pay for imports and exports in Indian rupees, analysts say, helping to achieve the long-term goal of internationalizing the Indian currency. India.

“This move is constructive for the rupee in the medium term as INR is higher [Indian rupees] demand for settlement implies lower demand for foreign exchange for current account transactions,” said Radhika Rao, Senior Vice President and Economist at DBS Bank, said in a recent notes.

This will facilitate “trading with neighboring countries, with trading partners unable to access dollar funds and/temporarily outside the international trade mechanism and those seeking to expand their trade settlement currency,” she wrote.

Remittances are still resilient

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

Remittance flows to India grow 8% to $89.4 billion in 2021, based on a recovery in the United States, which accounts for a fifth of the country’s remittances, according to World Bank data.

“Remittances can be determined by many factors but [a] A weaker rupee helps increase the domestic value of those remittances, which should help offset inflationary pressures on recipients,” said Sinha from BofA Securities.

Goldman Sachs also said in a recent note, remittances to India “will remain resilient thanks to steady economic growth in the Middle East, benefiting from higher oil prices.”

Deficit problem

However, India’s growing current account deficit is expected to continue to be a drag on the rupee, exacerbated by ongoing massive capital outflows, analysts warn.

“India’s external balances are deteriorating, as the trade shock from higher commodity prices leads to a larger current account deficit,” said Santanu Sengupta, India economist at Goldman Sachs. .

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

In an unfavorable market environment for emerging market capital inflows, “we estimate a large balance of payments deficit. This means that foreign exchange reserves continue to decline on the spot books. and maturities held by the RBI,” he added.

With global capital outflows drying up during the Fed tightening cycle, US recession looming and India’s external balances becoming challenging, we could see INR continue. weakening in the future.

Santanu Sengupta

Indian economist, Goldman Sachs

According to a recent note by Nomura, Indian stocks experienced $28.9 billion in net outflows as of July, the second most among Asian economies, excluding Japan.

But India’s large external buffers have “created confidence in the RBI’s ability to prevent tail risk scenarios spilling over into domestic interest rates and further impacting growth as the country is experiencing a tough period due to higher commodity prices and supply disruptions, along with tighter tightening, Sinha said.

“Our balance of payments deficit forecast suggests a shortfall of $30-50 billion this year. The RBI has enough reserves to sustain the intervention for at least another year,” he added.

In an effort to protect the rupee, the central bank announced a series of measures recently aimed at encouraging capital inflows. Measures include easing regulations on foreign deposits, relaxing norms for foreign investment inflows into the debt market, and foreign commercial borrowing.


Despite the rupee’s current underperformance, the currency’s decline has been more restrained than the “rage” in 2013, citing good fundamentals, analysts said. more during this time.

At the time, the Federal Reserve’s decision to scale back unusual monetary stimulus triggered a sell-off in bonds, sending bond yields up and the US dollar strengthening. That led to money outflows from emerging markets.

“Much [the Indian rupee’s] The downside pressure stems from the strong US dollar appreciation as the US dollar benefits from wide policy and exchange rate differentials,” DBS’ Rao said in a recent note, explaining the spread. high interest rate differential between greenback and rupee as interest rates in the US continue to rise. .

The pressure to defend the falling rupee is no longer as high as it was in anger, she added. If pressure mounts, the government has options such as postponing purchases of bulky defense items to help reduce demand for dollars, she wrote.

Analysts also argue that India’s external balances, which are often seen as a source of vulnerability, have some buffers in place to hedge against the risk of further rupee devaluation.

Sengupta from Goldman Sachs said: “So far, even with external balances deteriorated, foreign exchange reserves have limited the vulnerability of India’s external sector and allowed for the INR. (vs USD) slows down,” said Sengupta from Goldman Sachs.

“In the future, as foreign exchange reserves dry up and real spreads narrow, India’s external vulnerability risks will increase – although they will likely better compare ‘furious’. “

Can Rupees Drop to 82 Per Dollar?

As global conditions continue to change, the rupee will face further downside risks in the coming months, analysts said.

Goldman Sachs’s Sengupta said: “With global capital flows drying up during the Fed’s tightening cycle, a US recession is at risk and India’s external balances are becoming challenging. we are likely to see the INR continue to weaken going forward,” said Goldman Sachs’ Sengupta.

As a result, the bank forecasts the Indian currency could stay at 80-81 rupees per dollar over the next 3 to 6 months, “with risks tilted to further weakness in the event of a stronger dollar.” “, he added.

Other analysts even expect the rupee to test new lows in the near term.

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Craig Chan, Nomura’s head of global FX strategy, said he doesn’t believe the “80s are sacrosanct.”

“We don’t believe there are any particular market positioning factors that could lead to a faster USD/INR rally if 80 breaks – unlike 2013,” he added, referring to the timing. period “insect”. “Our last call was INR [rupee] at risk of breaking $80 and surpassing 82 by the end of August.”

Sinha from BofA Securities also expects the Indian currency to hit 82 by the end of 2022 as the global environment continues to be volatile.

“However, we see a greater downside risk posed by the RBI’s ample reserve buffer,” he said.

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