MC Analysis | Rupee at 78: Is that the new normal for the currency?

Will 78 be the new exchange rate for the rupee against the dollar?

Some analysts think so. The rupee is likely to swing between 78 and 82 per dollar for the next two to three months, LKP Securities said in a note on July 20.

Both local and global factors may keep pressure on the Indian currency. The Reserve Bank of India’s options are limited. Apart from that, the possibility of interest rate hikes in the US and rising crude oil prices also impact the rupee.

The local currency has been on a free fall and its course hasn’t changed much after measures announced by the RBI and the government. These include opening up paths for more foreign fund inflows and import duty hikes.

Amid the major global headwinds, the RBI may have limited ability and it may have to let the currency find its new normal.

Although the central bank does sell dollars to curb volatility in the market, it runs the risk of reducing the country’s foreign exchange reserves, which were at $580 billion in the week ended July 8, slipping by $27 billion from end-March.

The crisis in neighbouring Sri Lanka serves as a reminder to the RBI that a fall in forex reserves isn’t a good thing. India can’t afford a weak cushion.

To be sure, the RBI has done its bit. On July 6, the central bank announced a series of temporary measures primarily aimed at attracting fresh fund flows into Asia’s third-largest market. It allowed foreign investments in shorter-tenure bonds without any upper limit under the fully accessible route, permitted banks to raise deposits from NRIs at higher interest rates, and increased the limit on external commercial borrowings for companies under the automatic route.

However, in India, foreign institutional investors are in flight mode. Since October 2021, they have sold securities worth over $34.41 billion and so far this year, they have sold $29.64 billion of Indian equities. That trend is unlikely to reverse unless there is clarity on the US Federal Reserve’s moves.

So, where does that leave the rupee? Most analysts agree that the central bank needs to let the rupee find a new normal.

Going ahead, lot will depend on rate moves by the US Federal Reserve and oil prices. US President Joe Biden failed to get an agreement from Saudi Arabia on increasing oil supplies during his recent Middle Eastern trip. That disappointed the markets globally and led to a jump in crude oil prices.

However, too much weakness in the rupee can be a shocker for India’s imports, will have ripple effects on inflation, and put pressure on the current account deficit. The RBI knows this but its options are limited.

As far as the local currency is concerned, it’s a tightrope walk for the central bank.