The rupee is expected to fall to Rs 79 against USD in 2 months

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Do you know why the currency depreciates?

Currency depreciation causes inflation and directly decreases people’s purchasing power; this results in higher travel costs abroad, higher tuition fees for children studying abroad and increased spending on imported goods such as food, wine, cars, telephones laptops and laptops, among others.

However, it could serve various purposes and objectives at the national level. Countries should take into account domestic inflation and maintain a moderate and calibrated rate of currency depreciation to increase their cost advantage and competitiveness. However, runaway depreciation can wreak havoc and turn into a nightmare. For foreign investors, unstable currencies are a big NO.

In two months, the rupee will probably depreciate to 79 against the US dollar.

On Tuesday, the Indian rupee rallied slightly from record lows as it followed the downward trend in domestic equities, high crude oil prices and continued foreign capital outflows. However, the dollar index remained closer to its highest level in 20 years, which led to the fragility of the rupee. Notably, it looks like the Rupee’s depreciation will continue for some time as the deteriorating inflation outlook and the continued cycle of interest rate hikes continue to weigh heavily on sentiment.

The closing price of the rupiah on the interbank foreign exchange market was 78.03 against the dollar index. An intraday high and low of 77.90 and 78.07 were recorded for the local currency. The Indian rupee previously hit a new all-time low of 77.28 before ending at 78.04.

The dollar should continue to climb on solid foundations, according to Yes Bank’s Eclogue analysis.

The arguments for keeping the dollar at its highest level are compelling. According to Yes Bank, due to the nature of the fiscal stimulus that has spurred consumer demand, inflation is a bigger problem in developed economies than in developing ones.

USDINR fell from 77.87 before hitting a new high of 78.3950, which was a new high for the currency pair. USDINR started the week at 77.97 and was bullish throughout the week.

Dollar buyers have ensured that the rupee does not rise with every downturn. The Rupee was able to weaken because the majority of Asian currencies were also weaker as the RBI took control around the 78.40 levels and ensured that the depreciation remained under control without changing its course.

The weekly closing price of the rupee was 78.3450.

The main causes of the continued depreciation of the rupiah are the purchases of dollars by oil companies and foreign portfolio investors (REITs) who have sold shares.

Despite recently peaking at $125 a barrel, Brent oil has consistently traded above $105 a barrel. Oil accounts for 83% of our imports, and as its price increases, our current account and trade balance also increase.

Our trade deficit peaked at $24 billion on May 22. This is the highest level to date. Compared to a surplus of 0.9% in FY21, the current account deficit (CAD) for FY22 amounted to 1.2% of GDP.

A deficit of 3-3.5% of GDP is forecast for FY23. The South Korean won, or KRW, fell to its lowest level in 13.5 years against the dollar, while other currencies Asians have been on the wrong side. Against the dollar, the Japanese yen is at its lowest in 20 years.

The Reserve Bank of India (RBI) has no choice but to devalue the rupee against the US dollar in order to maintain its competitiveness.

The Indian rupee is expected to maintain its devaluation due to the strong dollar, and the RBI has lowered interest rates in anticipation of future rate hikes to control inflation.

After raising interest rates by 75 basis points at its last meeting, the US Fed is expected to raise rates by another 75 basis points at its July 2022 meeting and by another 50 basis points in September.

Since the US FED hiked rates by 175 basis points (bps) and the RBI only by 110 bps, the interest rate differential between the US dollar and the Indian rupee has widened. Shrunk.

Futures points fell due to the narrowing of the interest rate differential between the two currencies. The 1-year forward rate, which was 4% on April 18, 2022, has fallen to 2.90%, and forward rates for 6 months and less are currently below 2.5%. A hollow of 8 years, that.

rupee

A shortage of dollars can cause futures prices to fall and spot prices to rise. Along with the dollar index, which rose to 104.23 as a result, the rupiah also came under pressure.

The weakening of the Rupee will ensure that our inflation remains high and inflationary pressures keep interest rates high. The CAD will rise 3% and the BOP could turn negative as REITs sell while silver moves much slower.

Maybe FDI won’t be as high as it was last year. Before March 22, the majority of companies contracted debts in foreign currencies.

Their interest charges have risen in line with US interest rates, and since the rupee is weaker, companies would have to make larger repayments to cover the same dollar amount.

Both the rupiah and stock markets have suffered from the recent expectation of a recession in the United States.

Although the pace may be slow, we expect the Rupee to continue to lose value. In the following two months, it could reach Rs. 79 per dollar.

To reduce demand and lower inflation to less than 6%, the RBI needs to raise rates faster. The rupiah could appreciate somewhat and have better prospects if the war ends and oil prices fall.

The oil and gas industry as well as importers of raw materials, whose prices will keep inflation high, will be affected by the depreciation of the rupee.

Exporters will benefit, but since foreign importers are sophisticated and would demand a fair share, exporters may have to provide them with some of the benefits.

Companies with external debt will be the hardest hit as rising interest rates and a stronger rupee will increase their debts.

The Indian rupee has lost 5% in value against the dollar so far in calendar year 2022, and so far in fiscal year 23 by 3.2%. Yes Bank added that USDINR was down 2.0% in the previous three months and 6.9% in the previous year.

In our view, the main obstacle to growth would be domestic demand, which could continue to be hampered by weak wage growth, low levels of job creation and the continued use of contract labour. All of these factors would be compounded by an increase in food inflation, which would limit consumers’ discretionary spending. Our FY23 growth forecast is 7.0%, but there is downside risk. A Yes Bank report said

Is the Indian rupee stable?

rupee

  • The Indian rupee hit an all-time low against the US dollar at 78.29. Yet overall, it is a stable currency that steadily loses value to account for historically high inflation in the economy.
  • A larger current account deficit and portfolio outflows by FIIs are to blame for the recent devaluation of the Indian Rupee. The difference between the amount coming from exports and coming out from imports is known as the current account deficit (CAD).
  • Due to rising cost of importing commodities such as gold, oil and other raw materials, India’s current account deficit is expected to widen in FY2022 to reach 3% of GDP. However, the RBI governor is quite confident that India will weather this storm with relative calm thanks to its strong foreign reserve position ($601 billion last week).
  • Continued strength in IT services and other remittances contributed significantly to the CAD decline. Being one of the economies with the fastest growing rates, India is probably one of the favorite places for FII and FDI investments.
  • However, after the current global turmoil subsides and most central banks work to repair their economies, the Rupee is expected to be relatively stable for longer than the next six months.
  • Ask the citizens of Venezuela, Pakistan, Sri Lanka, Turkey, Iran and a host of other countries in South Asia and Europe. High inflation, debt and currency volatility are a toxic mix. Optimizing interest rates, inflation, GDP growth, employment, liquidity and exchange rates is one of the most crucial responsibilities of a central bank.

Edited by Prakriti Arora

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