rupee: Currency Woes: Rupee likely to weaken to Rs 79 vs USD in 2 months

USDINR opened the week at 77.97 and was biddish for the entire week as it made a low of 77.87 before making a fresh high of 78.3950 which was a new high for the currency pair.

On every dip, there were buyers of $ who ensured that the rupee does not appreciate. Most Asian Currencies were also on the weaker side thus allowing the rupee to depreciate as RBI took control at 78.40 levels and ensured that weakness remains in control while not changing its direction.

The rupee closed the week at 78.3450.

Dollar buying by oil companies and foreign portfolio investors (FPIs) who have been sellers in equities were the major reasons for the weakness in the Rupee.

Brent Oil has been consistently above $105 per barrel though it has fallen from a peak of $125 recently. Oil forms 83 per cent of our imports and if it remains higher our current account and trade account remain higher.

In the month of May-22, our trade deficit recorded a high of $24 billion which is the highest till date. The Current Account Deficit (CAD) for FY-22 ended at 1.2% of the GDP as against a surplus of 0.9% in FY-21.

The expectation for FY-23 is a deficit of 3-3.5% of the GDP. Asian currencies have been on the weaker side with KRW (South Korean Won) making a 13.5-year low below 1300 to the $. The Japanese Yen is at a 20-year low to the dollar.

To ensure competitiveness the Reserve Bank of India (RBI) has no other alternative but to weaken the Rupee against the USD.

The US FED has been on a rate rising spree making a 75 bps hike in its last meeting and there are expectations of another 75 bps hike in the July 2022 meeting and another 50 bps hike in the month of September.

The interest rate differential between $ and Rupee has been coming down as the US FED has raised rates by 175 bps till date while the RBI has done it by only 110 bps.

This has shrunk the interest rate differential between the two currencies thus bringing the forward points down. The 1-year forward which was at 4 per cent on 18th April 2022 has come down to 2.90 per cent, while the 6-month and below time period forward rate is now just 2.5 per cent. This is an 8-year low.

There is a dollar scarcity which could take forwards lower and spot higher. This has also put pressure on the rupee apart from the dollar index which has moved higher to 104.23.

The weakness in the rupee will ensure that our inflation remains higher and inflationary pressures will keep interest costs high. The CAD will be higher at 3% while the BOP could also be negative as FPIs are on the selling side while the flow of funds has slowed down considerably.

The FDI may not be as high as last year. Most companies have taken foreign currency debt in the months prior to March-22.

Their interest costs have risen as US interest rates have risen and their repayments will rise due to a weaker rupee as they require to pay more rupees against the same amount of dollar. The recent expectation of a recession in the US has also taken a toll on the stock markets and accordingly the rupee.

We expect the rupee to be on the depreciation path though the pace may be slow. It may touch Rs. 79 to the dollar in the next two months.

The RBI needs to do faster rate hikes to curb the demand and bring down inflation to below 6%. However, if the war ends and the oil prices fall, we could see some appreciation and better prospects for the rupee.

The sectors that will be impacted by the depreciation of the rupee are oil and gas and commodities (importers) whose prices will keep inflation high.

Exporters would gain but the foreign importers are smart enough and will extract their pound of flesh and exporters may have to pass on some of the gains to them.

The corporates having foreign debt will be most impacted as higher interest rates and higher USDINR will increase their payables.

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