The slide in the value of Indian rupee versus the US dollar continued, as the former closed at 79.37 against the American currency on July 5, amid concerns of a wider current account deficit coming to the fore.
The country's merchandise trade deficit rose to $25.6 billion in June 2022, 62 percent higher than June 2021, as per the official data shared on July 4.
Record high trade deficits will be the norm now and the rupee is likely to fall to 82 against the dollar in the third quarter of 2022, analysts at Nomura have said.
The earlier record in the trade deficit was reached this May at $24.3 billion. On a seasonally adjusted basis, the trade deficit widened to $29.9bn from $25.8bn in May.
International factors including "heavy portfolio outflows, soaring crude oil prices, and a rising interest rate regime of the major central banks have been the key catalysts behind this recent bout of weakness in the rupee-dollar exchange rate", said Sugandha Sachdeva, vice president - commodity and currency research, Religare Broking Ltd.
"Moving ahead, we foresee the Indian rupee heading lower towards the 80-81 zone against the dollar, though the RBI is expected to proactively intervene in the markets to curb the pace of decline in the domestic currency," Sachdeva added.
Widening CAD is going to remain a drag for the rupee, which will be worsened by the FPI outflows–$28.9 billion year-to-date net foreign outflows–and the currency will fall to 82 against the US dollar in the third quarter of 2022 and then rise to 81 in the fourth quarter. There will only be “limited offset” from India’s FDI and OI inflows, the analysts at Nomura noted.
The Federal Reserve’s aggressive tightening, which will lead to a stronger dollar, can cause a recession in the US by the fourth quarter of 2022, according to Nomura.
The analysts wrote, “Such an environment is not conducive for EM/Asia FX that are dependent on healthy global growth and equity-related inflows, including INR.”
“We are also somewhat concerned about the RBI’s apparently ambivalent commitment to its 4 percent inflation target, which could further discourage FPI into the local bond market (year-to-date net foreign outflows of $2 bn),” they added.What could slow down the rupee depreciation is RBI’s dollar selling intervention, the analysts said.