In the recent week, the value of the INR has fallen steeply to an all-time low of Rs77.63/$. The fall in the rupee has been triggered by a number of factors including dollar strength, FPI outflows and persistent commodity inflation that has made the rupee intrinsically weaker.
Steep fall in the rupee
In the last few weeks, the rupee was on a free fall. At Rs77.63/$, it is a historic low for the rupee. What is rather scary about this fall is that it has come at a time when India’s exports have been growing rapidly, RBI forex reserves have been abundant and the FPI outflows are largely offset by domestic flows. It is in this context that the sharp fall in the INR becomes truly worrisome. But, let us look at the key factors in this game.
Currency values are relative and one big reason for rupee weakness is the dollar strength. The dollar index is at 104 and has shown tremendous strength, trading at a 20-year high. A hawkish Fed has led to the sharp strength in the dollar. The second big factor is FPI outflows. In the last 7 months, FPI outflows from equity and debt have been over Rs.2.05 trillion. That is a lot of money and as FPI outflows also have a currency angle, the impact gets amplified. Thirdly, the sharp spike in commodity inflation has led to a lot of imported inflation in India due to its 85% dependence on imported crude. This has been the third big factor leading to rupee weakness.
Will the RBI support the rupee?
That the RBI has been trying to defend the rupee is evident from the depleting forex reserves. In fact, India has seen a depletion of $52 billion in its forex chest in the last few months; falling from $647 billion to $595 billion. That is an indication that the RBI has been trying to defend the rupee by selling dollars in the forex markets. Obviously, that has not been enough. Going ahead, RBI will have 2 mandates, with big depletion in forex reserves. Firstly, it will only intervene if there is the risk of a systemic crisis, not otherwise. Also, a weak rupee is going to be conducive to exports, so that is not a very bad situation to have, after all.
Will the Rupee dip beyond 80?
Most forex traders are averse to committing to any levels but the currency futures trading shows the rupee dipping to around Rs79/$ by end of the year. But, forex traders feel it could largely depend on how the RBI and the Fed sync their rate hike moves. If the RBI falls behind the Fed in terms of rate hawkishness, then we could see a dip in the rupee. However, a more hawkish policy stance from the RBI could also lead to more stability for the rupee. Eventually, FPI flows will hold the key, but as we have seen in the past, FPIs tend to re-enter Indian markets after any 7-10% dip in the rupee to capitalize on the arbitrage. For now, rupee projections look less like analysis and more wishful thinking.