Rupee faces risk of further decline against dollar in near term: Experts

Indian rupee may further depreciate to 82 to a dollar in the near term due to widening of trade deficit and expected aggressive rate hike by the US Fed later this week to tame record high inflation, economists said.

There is widespread speculation that the US Fed in its July 26-27 meeting may increase the interest rate by 50-75 basis points, which could result in flight of capital from emerging nations like India. With dollar outflow and elevated level of crude oil prices, the rupee would see further depreciation.

Last week, the rupee depreciated to a life-time low of 80.06 a dollar.

Economists are of the opinion that the rupee after touching a life-time low may settle around 78 to a dollar by March next year with stability around crude oil prices and likely improvement in geopolitical situation.

"Overall what we had assessed is that the rupee could settle somewhere around 79 to a dollar. That will be the average price for the entire year...in the current depreciating cycle, the rupee may fall to over 81/USD in the current political situation," India Ratings & Research principal economist Sunil Kumar Sinha told PTI.

Amidst a rebound in crude oil prices and the expectation that the US dollar will remain relatively strong in the immediate term, ICRA expects the rupee may weaken to 81/USD in Q2 FY2023.

"Subsequently, global sentiment and the direction of foreign portfolio investment (FPI) flows will determine if the Indian rupee continues to depreciate in the remainder of the year, or if US recession fears eventually arrest the dollar strength," ICRA Chief Economist Aditi Nayar said.

According to Nomura, the rupee may see 82 level during the July-September quarter due to multiple headwinds including weakening India BoP dynamics and Fed hikes during the year.

Crisil expects the rupee to be under pressure in the near term and the rupee-dollar exchange rate will remain volatile with depreciation bias in the near-term due to widening of the trade deficit, FPI outflows, and strengthening of the US dollar index owing to rate hikes by the US Fed and safe-haven demand for the dollar amid geopolitical risks.

"However, the pressure may ease towards the end of the fiscal, as crude oil prices are expected to come down, and the Fed slows its rate hike spree. Hence, we expect the exchange rate to settle to 78/USD by March 2023, compared with 76.2/USD in March 2022, with a lot of volatility thrown in between now and then," Crisil principal economist Dipti Deshpande said.

Trade deficit ballooned to a record USD 26.18 billion in June due to costlier imports of crude oil, coal and gold. The deficit widened to USD 70.80 billion in April-June this fiscal.

Last week, RBI Governor Shaktikanta Das said the central bank has no particular level of the rupee in mind, but it would like to ensure its orderly evolution and emphasised zero tolerance for volatile and bumpy movements of INR against dollar.

The Governor had also indicated that the central bank would use forex reserves when required to deal with currency volatility.

"After all, this is the very purpose for which we had accumulated reserves when the capital inflows were strong. And, may I add, you buy an umbrella to use it when it rains!," Das said.

The country's foreign exchange reserves had declined by USD 7.541 billion to USD 572.712 billion in the week ended July 15.

On further intervention from the government and the RBI to stem the fall in rupee EY India chief policy advisor D K Srivastava said the Centre may temporarily reduce customs and excise duty on selected products.

Also, he said, India can take a more aggressive approach towards internationalizing the Indian Rupee so that it may be used both as a reliable currency for trade and as a currency that many developing countries can keep as foreign exchange reserves.