Wednesday, August 10, 2022
Home > Stock Market > India’s currency is under pressure — and analysts say the rupee could test new lows

India’s currency is under pressure — and analysts say the rupee could test new lows

Two thousand rupee notes on display with an Indian flag in the background.

Manish Rajput | SOPA Images | LightRocket via Getty Images

The Indian rupee has come under intense selling pressure due to a perfect storm of global headwinds which analysts say will continue to pummel the currency in the months ahead.

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

The currency has since regained some ground and was around 79.06 to the dollar on Thursday.

The recent sharp declines prompted a swift response from policymakers to assuage concerns about a rupee sell-off, which could drive prices even lower.

Finance Minister Nirmala Sitharaman attributed the rupee’s depreciation to external reasons, in a written statement to parliament in late July.  

Global factors such as the ongoing Russia-Ukraine war, soaring crude oil prices and tightening of global financial conditions are among the key reasons for the weakening of the Indian rupee against the dollar, she said. 

Analysts agreed the currency is being buffeted from multiple fronts globally.

Soaring energy prices 

Early data from June showed India’s supply of Russian crude reached nearly 1 million barrels per day, up from 800,000 barrels per day in May, according to investment advisory firm Again Capital. 

“Usually, weaker currency acts as a pressure valve to restore external stability by making exports more competitive and reducing demand for imports by making them more expensive,” said Adarsh Sinha, co-head for Asia-Pacific forex and rates strategy at the Bank of America Securities.

“Oil imports from Russia, if settled in rupee, would reduce dollar demand from oil importers. These rupees could be used to settle payment for Indian exports, and/ or invested into India – both could be beneficial,” he told CNBC.

Read more about energy from CNBC Pro

In July, India’s central bank put in place a mechanism for international trade settlements in Indian rupees. The measure allows traders to bill, pay and settle imports and exports using the Indian rupee, which will help a long-term goal to internationalize the Indian currency, analysts said.

“This move is constructive for the rupee in the medium-term as higher INR [Indian rupees] demand for settlements implies lower demand for forex for current account transactions,” Radhika Rao, senior vice president and economist at DBS bank, said in a recent note.

This will facilitate “trade with neighboring countries, with trading partners who are unable to access dollar funds and/are temporarily outside the international trading mechanism and those looking to broaden their pool of trade settlement currencies,” she wrote.

Remittances remain resilient

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

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

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

Goldman Sachs also said in a recent note remittances to India “should remain resilient on the back of stable economic growth in the Middle East, benefiting from higher oil prices.”

Deficit problems

‘Taper tantrum’

Can rupee drop to 82 per dollar?

Source link

Leave a Reply

Your email address will not be published.

%d bloggers like this: