Business Standard poll: The worst may soon be over for rupee, say experts

Currency seen at 80.20/$ by July end, stabilising at 80.50 in Sept

The Indian currency, which has depreciated almost 7 per cent against the dollar in 2022, may not weaken much over the next few months because experts believe that the US central bank may dial down the pace of monetary tightening in the second half of 2022.

According to the median of a Business Standard poll comprising 10 respondents, the rupee is seen at 80.20 per dollar at the end of July; this would imply a depreciation of 0.4 per cent from its last closing level of 79.88 per dollar.

At the end of September, the poll showed the rupee shall weaken a bit to 80.50 per dollar.

So far in 2022, the rupee has shed 6.94 per cent versus the US dollar as the Federal Reserve’s unequivocal commitment to tackling high inflation through rate increases has stoked worries of a global economic slowdown and sent investors rushing to the safety of the greenback. 

The dollar index has strengthened 13 per cent, so far, in 2022, ascending to levels last seen in 2002, Bloomberg data showed.

The Federal Reserve, which has raised interest rates by a total of 150 basis points, so far, in 2022, is widely expected to announce a fresh rate hike of 75 to 100 bps in its policy statement at the end of July.

Most emerging market currencies, including the rupee, have suffered, with global funds preferring higher returns in the world’s largest economy at a time of growing risk aversion.

Within the emerging market pack, the rupee’s depreciation versus the US dollar in 2022, so far, has been less than that witnessed by the Turkish lira, the South Korean won, the Philippine peso, the Thai baht, and the Taiwan dollar. These currencies have lost around 8-22 per cent versus the dollar.

Over the period, the rupee has, how­ever, fared worse than the South African rand, the Malaysian ringgit, the Chinese yuan, the Indonesian rupiah, the Singapore dollar, the Hong Kong dollar, the Mexican peso, and the UAE dirham.

The combination of a stronger US dollar and the hardening of global commodity prices since the start of the Ukraine war in February have taken a toll on the rupee by widening India’s current account deficit.

In June, India’s monthly trade deficit climbed to an all-time high of $26.18 billion, with oil imports almost doubling to $21.3 billion. India imports more than 80 per cent of its crude oil needs.

“The present dynamics suggest that the rupee may remain weak, driven by the stronger rate outlook in the US and a continued negative balance of payments domestically,” said India Ratings and Research Director Soumyajit Niyogi.

Turbulence may ease

While the rupee is seen depreciating versus the dollar, there are factors to suggest that the domestic currency may stabilise in the second half of 2022.

With the Federal Reserve seen pulling out all the stops to tame inflation in the first six months of the current year, analysts believe the US central bank shall tone down rate hikes going ahead, especially as concerns of a US recession deepen.

If, as widely expected, the Fed raises rates by 100 basis points at the end of July, the rate action would mark the biggest increase since the central bank directly started using overnight interest rates to conduct monetary policy in the early 1990s.

Fed Chair Jerome Powell had recently acknowledged the possibility of the US economy slipping into a recession with aggressive rate hikes leading to a significant tightening of financial conditions.

From India’s point of view, a favourable development that has emanated from global growth worries is the cooling of crude oil prices. From a 14-year high of $140 per barrel in March, Brent crude futures were last trading around the $100 per barrel mark, easing some pressure on India’s import bill.

“Right now, the risk is of the Fed being extra hawkish. We are anticipating a peak in inflation in the second half,” said Anindya Banerjee, V-P, currency derivatives & interest rate derivatives at Kotak Securities. “Once that happens, the Fed’s hawkishness will wane; moreover, commodity prices have also shown correction in anticipation of slower global growth. That’s the reason for a stronger estimate for the rupee by the end of September.”

Kotak Securities sees the rupee at 79.50 per US dollar at the end of September.

Analysts also pointed out that the rupee could gain support from the possibility of a reversal in foreign portfolio outflows later during the year. Overseas investors have been on a relentless selling spree of Indian equities since October 2021, with their net sales of domestic financial assets, so far, in 2022 amounting to around $30 billion.

However, with the RBI recently announcing a slew of measures, such as relaxation of norms for firms’ overseas borrowing and wider investment in debt, some degree of foreign flows may materialise in the latter half of the year, currency traders said.

Moreover, if India’s inflation does begin to soften, as some indicators suggest, foreign investors may again consider parking funds in domestic assets as the RBI lifts interest rates further.