Indian Rupee: A Weaker Quarter Ahead

The rupee is likely to remain weak but range-bound, according to analysts and economists.

<div class="paragraphs"><p>(Photo: Rupixen/Unsplash)</p></div>
(Photo: Rupixen/Unsplash)

Indian rupee is expected to remain weak but range-bound with the dollar likely to continue strengthening, according to analysts and economists.

The rupee has depreciated 40 paise to a fresh record low of 81.26 against the greenback early on Friday. This is the first time the currency has weakened past 81 against the U.S. dollar. It had hit a record low of 80.87 on Thursday after the Fed’s rate hike and hawkish commentary.

Year-to-date, the rupee has depreciated 8.9%, while the dollar index has risen 15.2%.

Indian Rupee: A Weaker Quarter Ahead

Dollar strength, a massive trade deficit, a recessionary global environment and subdued equity and bond markets are likely to weigh on the rupee, said Samir Lodha, founder at QuantArt. He expects the rupee to move between 82 and 83 against the dollar in the next three-four months. In an extreme case, if the recessionary global environment leads to a credit crisis or liquidity crisis, then 85-86 levels could be expected, he said.

Anindya Banerjee, vice president-currency and interest rate derivatives at Kotak Securities, said the Reserve Bank of India is likely to come in, as it still has ample reserves, until and unless FPI flows turn drastically negative. As such, the rupee will stabilise between 81 and 82 in the next few weeks.

The RBI now has little option but to let the rupee slide gently, said Nirav Sheth, CEO (institutional equities) at Emkay. The central bank has expended about $80 billion—about 15% of reserves—moderating the rupee fall, and that was the apt policy choice then, he said in a note.

As the RBI was selling down dollars, the excess liquidity (as reported at LAF window) normalised from Rs 8-lakh-crore surplus to Rs 1-lakh-crore deficit at present. This was in sync with its policy normalisation move as well, Sheth said. The central government balances with the RBI at about Rs 3.6 lakh crore is expected to eventually ease the deficit, according to the note. But given growth dynamics (real GDP growth still below trend growth unlike developed economies) and the RBI’s own policy stance, LAF’s ideal liquidity should be around Rs 2-2.25 lakh crore or about 1% of net demand and time liabilities.

The RBI’s policy choices now will be more limited—any significant dollar sales will tighten liquidity (and interest rates) and start choking growth, he said. Of course, the RBI can supplement the liquidity by OMO to replenish liquidity, this though can send confusing signals to market as policy rates are still being tightened, he said.

Still, the line of least resistance is now for the rupee to decline and the RBI will prefer flexibility over interest rates as against exchange rate. Also, the RBI could get a helping hand if DXY stabilises or crude corrects further, he said.

The Indian rupee has outperformed most emerging market currencies so far this year.

Post June onwards, Banerjee said, easing in oil prices and positive FPI flows have made the RBI intervention more effective.