scorecardresearchRupee: Is the worst behind for the domestic currency? Can exporters gain
Widening trade deficit prints and surging crude oil prices have also exerted pressure on the rupee.

Rupee: Is the worst behind for the domestic currency? Can exporters gain on the rupee's pain?

Updated: 15 Oct 2022, 10:39 AM IST

  • The slide of the domestic currency is likely to exacerbate as the rate hikes are likely to continue and crude oil prices may remain at elevated levels.

The rupee has seen a sharp decline in the last one year. From the 74-odd levels to nearly 83 per dollar level, the domestic currency has seen a slide despite the efforts of the Reserve Bank of India to save it from suffering a massive blow, thanks to hawkish Fed and foreign capital outflow.

Besides, widening trade deficit prints and surging crude oil prices have also exerted pressure on the rupee.

The slide of the domestic currency is likely to exacerbate as the rate hikes are likely to continue and crude oil prices may remain at elevated levels.

Brokerage firm Elara Capital believes USD-INR (rupee-dollar) may touch the 83.50 level by December 2022 and the 84-85 level by March 2023 amid an expected rise in crude oil price, depleting forex reserves and aggressive global monetary tightening cycle.

"The rupee, so far, has borne the brunt of an aggressive global tightening as hawkish Federal Reserve and interest rate differentials continue to weigh on its outlook. Elevated trade deficit prints and the recent surge in crude oil prices add to the near-term headwinds," said Elara Capital.

However, the brokerage firm expects that tailwinds may gradually gather steam for the external sector from Q1FY24 even as near-term turn-around in the INR is remote.

"We see significant tailwinds appearing and likely reversing the rupee to 82-82.50 by the first half of the next financial year (H1FY24E). Three main propellers to this would be: (i) abating DXY strength from Q2CY23E with Fed turning less hawkish, (ii) rising impulses of deflationary trends in global commodity prices from Q2CY23, and (iii) rebound in FII flows amid India’s steady growth outperformance, policy stability and easing oil prices," said Elara Capital.

The brokerage firm added that a correction in crude oil prices led by demand destruction (owing to the global recession) may create an enabling milieu for the Rupee to retrace lost ground.

Is the worst behind for rupee?

No, we can't say that the worst is behind the rupee.

The resilience of the Indian economy may strengthen the rupee but the growth outlook remains clouded by uncertainty. Recently, IMF has revised India's GDP growth this fiscal year to 6.80% due to pandemic effects, high inflation and tighter monetary policy.

RBI, too, seems to have limited potential to arrest the slide of the rupee.

"RBI has already spent $110 billion to arrest the rupee's slide, bringing down its forex reserves to over a two-year low. Thus, RBI has a limited potential to change the course of the rupee moves," said Praveen Singh, Fundamental Currencies and Commodities Analyst at Sharekhan by BNP Paribas.

"The US-China tiff over Taiwan is yet another source of concern for the markets. Unless the Fed pivots, it is hard to make a case for the rupee that the worst is behind us. The domestic currency may decline to 85 per dollar in the next three to six months," said Singh.

Raj Deepak Singh, Currency Analyst at ICICIdirect pointed out that the rupee hit all-time lows against the US dollar, with the dollar at its two decades high, amid global economic slowdown and concerns over continued rate hikes from major central banks triggering a possible recession.

"We do foresee that rupee may drop further towards 84 levels against the US dollar in coming months due to elevated crude prices, depleting foreign exchange reserves and higher trade deficit. Furthermore, continued strength in the US dollar index due to hawkish policy stance may also continue to pressurise the Indian rupee," he said.

Heena Naik, Research Analyst - Currency, Angel One also believes weakness in the rupee is going to continue and we can see the currency moving towards 83 levels. A break of this level could push the currency further towards 83.60 levels.

Naik underscored that the RBI is trying hard to curb the sharp weakness and make the rupee attractive for importers as well as to balance out the trade deficit. Apparently, the RBI has been selling dollars on the spot and at the same time conducting buy/sell swaps. The reserves are also on the decline which means RBI’s intervention is in full swing, said Naik.

Can exporters gain on the rupee's pain?

Export-oriented sectors, such as IT, pharma, textiles, etc. gain due to the weakness in the rupee. On the flip side, importers suffer because they have to shed more to match the value of the dollar.

Pankaj Pandey, Head – Research, ICICIdirect said beyond IT and pharma, beneficiaries of rupee depreciation include textile players, agro commodities exporters including sugar, a few auto ancillaries and a few pockets of capital goods companies which are exporters.

But the maths is not that simple. A recession-like situation in the US and Europe and the rupee's rise against the pound and euro are not going to offer any benefit of the rupee's fall against the dollar.

"The relationship between rupee depreciation and exporters is not an easy derivative and is anchored on export destination demand momentum, apart from the benefits of depreciation. Furthermore, in the case of IT and a few other sectors, exposure to Europe/UK would result in adverse implications as the rupee has strengthened against the pound and euro," said Pandey.

"The weakness in the rupee is likely to benefit some sectors namely information technology, textile, pharmaceutical, leather, etc. which means that foreign currency in India would increase," said Naik.

Jateen Trivedi, VP Research Analyst at LKP Securities said apart from the major beneficiaries IT and pharma, textile and jewellery sectors perform well as for export-based businesses, the dollar mode of payment helps better margins on their products.

Trivedi, however, underscored that the situation is slightly different this time because of the weak demand and the recession-like situation in Europe and the US dampening the exports number. Hence, there are limited gains as exports drop and only margins improve in consumer-driven sectors, said Trivedi.

Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.

What is rupee appreciation?
What is rupee appreciation?
First Published: 15 Oct 2022, 10:39 AM IST