Rupee at 80: Here’s how a falling Rupee could impact India's current account deficit
- The Indian Rupee has breached the psychologically important barrier of 80 against the
- Rupee depreciation has had a wide impact on India’s economy – from foreign investors pulling out an average of $6 billion each month in 2022 so far, to surging inflation and widening
current account deficit.
- All of this has an impact on the common man at the end of the day, and we try to decode the how, what and why of it.
AdvertisementIndian Rupee is now an octogenarian – after several days of touching new lows, Rupee hit a new record low of 80 against the US Dollar. Experts had predicted a fall to 80 by October this year, but we are only halfway through July now.
So, what explains this precipitous fall in Rupee and how will it impact the Indian government’s critical current account deficit targets?
Several factors have underlined the rapid fall in the value of Rupee, but analysts still think the Reserve Bank of India (RBI) has done a good job of keeping the volatility low – that is, sudden fluctuations in the value have been relatively less.
‘Good job RBI’, say analysts, but for how long?
“Indian Rupee has been a slight outperformer when compared against a basket of 26 top currencies, year-to-date. INR has depreciated 7.5% whereas median losses have been around 8.5%,” Anindya Banerjee, VP, currency & interest rate derivatives at Kotak Securities told Business Insider India, saying that this is thanking RBI’s aggressive intervention for it.
This essentially means that a decline in the Rupee’s value was more or less a given, and experts believe this could continue till the recession concerns are past us.
“As long as the USD continues to strengthen due to US Fed and global economic slowdown fears, Rupee will follow that trend,” Banerjee added.
Dollar is throwing India’s CAD targets in disarray
How long will the recession concerns continue? It is anyone’s guess at this point, but that means India has to brace for its impact on its current account deficit (CAD) targets.
According to a report by Bank of America Securities, India’s CAD could worsen to $105 billion in 2022-23, up from $86 billion last year.
“Although we continue to see Brent at $105 a barrel in 2022, higher non-oil, non-gold imports and lower exports are now likely to push CAD to 3% at $105 billion, up from 2.6% of GDP or $90 billion projected earlier," BofA Securities analysts said in a new report.
“We believe that crude will inch lower than $95 per barrel as the physical market is very tight,” Peter Maguire of XM Australia told CNBC TV18. Crude oil prices have already fallen below $100 per barrel, so the $95 mark, as per experts might not be too far.
It might not be all that bad – here’s why
What might come across as a relief to the Indian government, RBI and the common man is that commodity prices are cooling down rapidly – and this could be one of the first signs of inflation coming down.
Commodity prices have crashed to pre-Ukraine war levels, and experts believe this could be a sign of inflation slowing down. This could reduce the pressure off the Rupee.
“Weaker rupee will be inflationary but with commodity prices also falling globally, the inflation impact should not be much,” Banerjee added.
The finance ministry also echoed similar sentiments in its latest monthly economic review.
“For the present, their (crude and edible oil) global prices have softened, as fears of recession have dampened prices somewhat. This would weaken inflationary pressures in India and rein in inflation,” the report said.
However, the government thinks commodity prices have still not fallen enough to reduce India’s current account deficit, so there’s still some way to go before India and its citizens can stop worrying.
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