Market Walk

The Rupee-Dollar: How low can the rupee go against the US dollar?

Rupee- Dollar -tradeplus

Rupee Dollar – How low can the rupee go against the US dollar?

In the last few months, it has been a battle of wits between the forex market and the RBI. The RBI has been trying to defend the rupee at various levels and the rupee has been breaching many of these old levels on a consistent basis.

A 5.2% fall in the rupee

In the last few months, the Indian rupee has fallen from a level of 74/$ to 78.1/$ in a rather short span of time. That is a fall of nearly 5.2% in the rupee. The fall in the rupee has been driven by several factors, including FPI selling, strength in the dollar, limited intervention from the RBI, etc. In addition, the big factor that really drives the rupee lower is the oil price surge, which has gone up from $70/bbl to $120/bbl in just a few months.

How much will RBI intervene

RBI intervention is nothing new and, in the past, the RBI has intervened in forex markets to defend the rupee both ways. A sharp fall in the rupee makes imports costlier, and a sharp rise in the rupee could make exports unattractive. Hence, the RBI normally tries to keep the rupee in a managed range, which is not too harmful to the economy either way. The problem in the last few months has been the surge in oil prices, which has taken the monthly trade deficit to a high of $24.3 billion in May 2022. The RBI can not intervene beyond a point as that would undermine their forex reserves. India saw a 9% depletion in forex reserves.

It is about a strong dollar

The pressure on the rupee is not coming so much from the weak rupee but from the strong dollar. The rupee’s weakness due to the trade deficit is a done deal. Now it is about dollar strength, and the big trigger for dollar strength is the hawkishness of the US Fed. The Fed has plans to hike rates to 3.5% by the end of 2022 and to 4.25% by the middle of 2023. That is likely to result in a surge of flows into dollar assets, making the dollar a lot stronger. That is already evident from the movement in the Bloomberg Dollar Index (DXY), which has rallied from 92 levels to 105 levels over the last few months, hinting at dollar hawkishness.

Can the rupee cross 80/$1?

Supposed currency analysts like Jamal Mecklai have underlined that 80/$ was perfectly possible, especially if the Fed walks the talk on rate hikes. The RBI has a problem with dwindling reserves, so it will not try to defend the rupee beyond a point. The moment the RBI finds that the trend is towards a weaker rupee, it may just let the rupee weaken. But, the real X-factor in this entire equation will be the FPI flows. If the FPI flows turn positive and if the RBI is able to curb inflation, then the rupee may get a respite. Otherwise, the rupee looks to become progressively weaker in the weeks going forward. The RBI, with about 9-months of import cover, may not be able to call the shots beyond a particular point!

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