Indian rupee on July 18 hit a fresh record low as it ended closer to the psychological level of 80-mark amid crude oil rising back near $100 per barrel. This was the seventh consecutive session when the rupee weakened.
At close, the home currency stood at 79.98 against the US dollar, down 0.13 percent against the previous close. The currency opened at 79.75 and touched an all time low of 79.9825. So far this year, the currency has weakened 7.05 percent.
The recent data which showed the trade deficit widened higher than analysts' estimates and continued outflow from foreign investors also dampened sentiments. India's trade deficit ballooned to a record level of $26.18 billion in June mainly due to a jump in gold and crude oil imports. Imports expanded by 57.55 percent to $66.31 billion while exports in June rose by 23.52 percent to $40.13 billion.
According to ICRA economists, the upwardly revised merchandise trade deficit for June 2022 poses some upside risks to the current account deficit for Q1 FY2023, the correction in commodity prices has softened the outlook for the ongoing quarter, even though export growth may undergo a slowdown amidst a weaker outlook for the global economy. ICRA foresees modest downsides to our FY2023 current account deficit forecast of US$105 billion or 3.0% of GDP.
Global markets are already under pressure amid concerns of inflation and fears of a looming recession. India's CPI inflation stayed above 7 percent in June, while the US recorded a 41-year-high inflation, at 9.1 percent. Central banks around the world are likely to consider a steep hike in interest rates in order to tackle elevated inflation levels. FIIs sold around $29 billion in equities so far this year. The next Fed meeting is on July 26-27.
"The expectation of aggressive rate hikes by the US Fed is outweighing the impact of lower crude oil prices on the INR. We foresee a low of 81/USD by end September 2022. Subsequently, global sentiment and the direction of FPI 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.", said Aditi Nayar economist at ICRA.
The recent measures by the Reserve Bank of India is unlikely to soften the downward journey in the near term, analysts expect. Recently, the RBI announced internationalisation of rupee which analysts do not see any meaningful impact on the currency on immediate basis. Analysts continue to see a slow and steady depreciation towards 80/81.
"From the FED perspective, a stronger dollar helps in reining-in inflation as it makes the import cheaper for the US and tightens the financial conditions, both at local and global level. In this backdrop, where dollar assets look to be the most attractive in the world, in relative terms, we continue to see rupee on a slow and steady depreciation until capital flows move in and FED pivots. Until then, when in doubt, buy dollars", said Vikas Bajaj head of currency derivatives of Kotak Securities.
Recently, two brokerage houses slashed India's growth targets. After Nomura lowered India's 2023 GDP growth forecast to 4.7 percent from its earlier projection of 5.4 percent amid recession fears and rising interest rates, analysts at Morgan Stanley, too, cut their GDP growth estimates. Morgan lowered FY23 target by 40 basis points to 7.2 percent, while that for 2023-24 has been reduced by 30 basis points to 6.4 percent.
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