Rupee @80 | Top seven things to look out for as the currency stays downhill

The rupee breached the psychologically crucial 80-to-a-dollar mark in early trading hours on July 19.

The depreciation in the currency has been triggered by a host of macro fundaments like a surging global inflation, continuing war in Ukraine, and sustained outflow of capital by foreign institutional investors from the Indian equity market.

As the INR continues its downward trajectory, Moneycontrol talks to experts on top seven things that markets should look out for in the near term.

1. Who is impacted?

Domestically, oil importers and overseas borrowers are rushing to cover their positions against the likely further fall of the rupee, says CR Forex Advisors Managing Director (MD) Amit Pabari.

When panic grips, Pabari said, the market forces become overpowering. “Hence, if the 80 mark is taken out convincingly, then we shall see the rupee falling further to 81 to 81.50 levels by August-end,” he said.

As per Kunal Sodhani, assistant vice-president at Shinhan Bank India, market participants have been anticipating the rupee to depreciate more. The RBI, too, has been intervening to avoid excess volatility and any kind of sharp depreciation of the rupee, Sodhani said.

“I am personally not seeing any panic among importers but yes, they are eyeing for some retracement in the pair to hedge themselves at lower levels,” he said.

Separately, the rupee depreciation will impact students more as education loan rates, apart from cost of living, will likely rise, he said.

2. What it means for Indian economy?

Given that INR weakness is not an exception and rather largely driven by stronger US dollar, the overall impact will be more for foreign currency borrowers. It is also inflationary and brings challenges in monetary policy making at the same, says Soumya Niyogi, Director at India Ratings & Research.

3.  What it means for stock and bond markets?

Weak currency raises macro and micro risks, which is a big dampener for the capital markets, both equity and debt. And it creates adverse loops, like weak sentiment driving more foreign outflows from equity and debt, which is again negative for the currency, and it goes on, Niyogi said.

4. What should the concerned parties do to hedge their exposures?

Sodhani said importers are using both Forwards and Options trading tools to hedge their exposures.

Lower forward premiums are adding to the advantage of importers, he said, adding that he was witnessing multiple queries for hedging of ECB's (external commercial borrowings) via Full Currency Swap (FCS) or Interest Rate Swap (IRS).

“I would recommend Options to be a right tool for hedging import exposure,” Sodhani said.

5. So, where is the rupee headed in the near term?

As per ICRA Ratings Chief Economist Aditi Nayar, the rupee may weaken to 81-to-a-dollar level in July-September amid a rebound in crude oil prices, and expectation that the US dollar will remain relatively strong in the immediate term.

Subsequently, global sentiment and the direction of FPI (foreign portfolio investors) flows will determine if the INR continues to depreciate in the remainder of the year, or if US recession fears eventually arrest the dollar's strength, Nayar said.

“In our view, while rate hikes in the US may be sharp and front-loaded, they may end sooner than expected by the markets, if the recent downtrend in global commodity prices sustains. The associated expected change in sentiment will help EM (emerging market) currencies such as the INR from weakening sharply in H2FY2023 (October-March),” Nayar said.

6. Why DXY, oil prices matter?

As per Sodhani, investors’ eyes should be on the trajectory of Brent crude oil prices and the DXY index going ahead.

Brent crude futures contract, the global oil benchmark, was trading at $106.31 a barrel level as on 1147 IST. As India is a net importer of crude oil, a higher import bill will cause the country’s trade deficit to go up.

As per data released by the Union Commerce and Industry Ministry on July 14, India’s merchandise trade deficit rose to a record $26.1 billion in June 2022, 172 percent higher than June 2021 as prices of key energy and metal imports remained high. The latest figures are higher than the government's initial estimates of $25.6 billion, Moneycontrol reported.

Movement in the DXY index, which tracks the price of the US dollar against six foreign currencies, will be keenly monitored. Pabari said a recent retracement in DXY seems short-lived.

“We might see the dollar (DXY index) rising above 109 levels if the Fed hints at equal tightening in the upcoming meets,” he said. The DXY had closed at 107.37 level on July 18.

7. What are the next trigger points?

As per Nayar, investors will keenly eye the movement in domestic commodity prices, global inflation trajectory and magnitude of the anticipated rate hike by US Federal Open Market Committee (FOMC).

US consumer price index (CPI) rose 9.1 percent in June over the last year. The CPI inflation in US is at the highest level since last 41 years.

This prompted markets to swiftly reprice a 100-basis points US Fed rate hike, analysts at Kotak Institutional Equities said in a note. However, comments made by the Federal Reserve officials that that a 75-bps hike was more likely, led the markets to rescale the anticipated rate hike to 75 bps, the brokerage said.

Further, commodity price movements, weaker export demand impacting monthly merchandise trade deficit figures, magnitude of FII outflows coupled with size of forex reserve drawdown in coming weeks should be the key figures that the markets must track, Nayar said.