Five reasons why rupee can depreciate further, may fall below 80 per dollar

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The Indian currency is likely to depreciate further and the exchange rate may fall below 80 per US dollar, predict analysts and economists. A day after US reported inflation at 9.1 percent for the month of June - highest since 1981 - investors in the money market are jittery that the USD/INR pair will touch the 80-mark soon.

Analysts predict that the exchange rate may oscillate between 80 and 81 per US dollar for the Indian currency. So far in 2022, the Indian rupee has depreciated more than 7 percent against the US dollar.

Here are five reasons why Indian currency is likely to depreciate further in coming days:

1. Stability of Rupee: Despite facing several blows in the last few weeks, rupee has been one of the best performing currencies and also the stable one in Asia. “Rupee being one of the stable currencies, it has further room for depreciation. It may even touch 81 soon,” added Sugandha Sachdeva, vice-president, commodities and currency research at Religare Broking.

3. Better rate of returns in the USA: Although, the Reserve Bank of India (RBI) has taken several measures recently to ensure foreign currency inflow. But it will take time to compensate the loss India has incurred in the past few years, according to analysts and economists. The rate of returns in the bond yields in the USA has been more compared to the rate of returns in any Indian investment, thus investors tend to invest less in the Indian market. “In countries like the US, for deposits with a tenure of two to five years, the rate is close to 3 percent and more,” said Ashutosh Khajuria, ED, Federal Bank. On the other hand, the rate was low for deposits like FCNR(B) in India.

4. Rate hike by the US Fed: The Federal Reserve is expected to aggressively hike rates by 75 bps or point in the upcoming meet. “The recent inflation print in the US has raised the expectations of a more aggressive rate hike by the Fed, lending further strength to dollar,” added Shashank Mendiratta, an economist from New Delhi. Although the data of US inflation doesn't include the recent fall in crude prices the number continues to be very high. Moreover, lack of dollar inflows is also hurting the domestic currency as oil companies keep buying in the market, according to forex analysts. “markets are now pricing in a 100bps rate hike by the Fed later in the month. The same commentary has been reiterated by a few Fed officials after the US CPI report. This coupled with increasing risks of a global recession have contributed to a strengthening US dollar (currently hovering at a 20-year high) which will put further pressure on INR,” said Aditi Gupta, economist, Bank of Baroda.

5. Borrowed inflation: Economists explained how borrowed inflation is taking a toll on the Indian economy. Due to Russia-Ukraine war, inflation is hitting hard on countries across the globe leading to currency depreciation in most of the countries. India, despite its preventive measures, will feel the hit of the same.