Rupee at its lowest: What lies ahead for the Indian currency?

The Indian currency has been under pressure of late due to high inflation, sustained capital outflow by foreign investors and a sharp jump in crude oil prices. The Indian rupee fell 16 paise to 77.74 per dollar mark in trade on May 19.

The domestic unit has depreciated nearly 8 percent in the last one year and hit a fresh all-time low of 77.93 due to a rise in the Dollar index and concerns around global economic growth.

Even as the Reserve Bank of India (RBI) has been applying tools available to it to keep the rupees fall under check, foreign capital outflow and higher import bills have put much pressure on the Indian rupee forex reserve.

Geopolitical issues have inflicted more pain on the rupee, by shooting up the commodity and crude oil prices and making the market outlook hazy.

Analysts and experts are of the view that the rupee can make fresh lows and trade above the 78 mark in FY23.

The road ahead

The road ahead for the Indian currency looks challenging as the Ukraine war, inflation and rate hike regime will keep the currency under pressure. The anticipation of weak economic growth is an additional headwind that the forex market will have to deal with.

Due to volatile commodity prices and persisting global supply disruptions caused by the Russia-Ukraine conflict, India Ratings and Research (Ind-Ra) believes the Indian rupee to depreciate by 4.9 percent and average 78.19 per dollar in FY23.

"Weak economic data around the world, especially in China, has boosted the dollar index. Back home, we are witnessing an outflow of funds as investors move funds to high-yielding investment instruments. A rise in interest rates in the US will result in further outflows. We expect the currency to face pressure as inflation is on an upward spiral raising concerns about further rate action by the central bank,” said Nish Bhatt, Founder & CEO, of Millwood Kane International.

Some market experts on social media platforms claimed that the rupee may breach the level of 80 in the coming year which appears to be an exaggeration at this juncture.

Despite much turmoil in global markets, and sudden shifts in monetary policy regimes around the globe, Rupee has been more or less stable, due to aggressive interventions from RBI.

Anindya Banerjee, VP-Currency Derivatives & Interest Rate Derivatives at Kotak Securities pointed out that the data suggests year-to-date, that the rupee has been an average performer when compared to major global currencies. However, May has been a tough month for the currency, especially after the rate hike on May 4.

"Rupee has come under heavy selling pressure and is trading at a fresh all-time low against the US dollar. However, we expect 78 to hold for the time being, as RBI may remain an aggressive seller. A weaker rupee will feed into inflation and RBI would not like that to happen," said Banerjee.

RBI to keep the rupee up?

Banerjee believes after a weak month-to-date performance, the rupee should draw support from RBI's dollar selling.

G Chokkalingam, Founder & Head of Research, Equinomics Research & Advisory said the rupee is unlikely to crash by more than 2-3 percent in the next year.

"RBI's net purchases of dollars from open spot market are $45 bn in FY20, $68 bn in FY21, and $17 bn in FY22. After selling $20 bn of the dollar through the open spot market in March 2022 only, RBI’s net cumulative dollar purchases from spot open market is $130 bn. There is enough room to sell dollars in the open market, make a lot of profits, and then declare attractive dividends to the central government," said Chokkalingam.

At the moment, the RBI has enough forex reserve to keep the rupee up. The trouble can arise if the war extends to the two-three years and inflation continues going higher despite the rate hikes.

India's foreign exchange (forex) reserves dropped by $1.77 billion to $595.95 billion for the week ended May 6 dragged by a sharp drop in the country's foreign currency assets, the Reserve Bank of India (RBI) data showed. The foreign exchange reserves declined by $28.05 billion in the six months to March 2022.

"Forex reserves have 10 months of imports cover. So there is enough room to sell dollars in the open market to support the rupee. The rupee can breach 80 level and fall even more against the dollar if the western world and China join the Ukraine war directly and therefore inflation shoots up beyond control. There are tools available to support the rupee such as NRI deposits under special schemes and restrictions on gold imports. FIIs will stop selling equities on further depreciation of the rupee as their investment value will erode very badly and they would be trapped," said Chokkalingam.

Disclaimer: The views and recommendations made above are those of individual analysts or broking firms and not of MintGenie.