By Dilip Parmar
Indian rupee heads for the eighth monthly decline, the first time in the last two decades such kind of selling has been seen amid domestic and global worries. Central banks have unsuccessfully tried defending their currencies against the US Dollar by running down foreign currency holdings. The fight against depreciation has already drained their FX reserves. However, we are still the median performer among Asian peers mainly on the back of RBI intervention and better growth prospectus after the pandemic. For the current calendar year, India’s forex reserves fell from $633.61 billion to $564.05 billion, as per the latest weekly statistic published by RBI while the Indian rupee depreciated by 7% to 79.87, life low on the closing basis.
If we look at the performance of the Rupee versus major trading partner countries’ currencies, we find it gained only eight out of 26 countries. A deep dive into the data suggests the rupee has depreciated more than 5% against 11 currencies and 42%, the biggest drop after 2018 when it fell against 15 currencies and 58%.
India Import Cover vs Rupee
India’s import cover has been continuously falling with a widening trade deficit after covid19. During the lockdown, the country had a whopping 25 months of import cover but as the restriction was removed and demand surged the trade deficit widened to $30 billion in July 2022 while in June 2020 it was a $0.8 billion surplus.
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Globally commodity prices witnessed a parabolic rise following supply worries and higher demand in the last two years. In the same period, the rupee depreciated by around 11% while import covers declined from 11 months to now just seven and a half months only. But this time situation is far better than the year 2013 as we have a whopping $564 billion in forex reserves and one of the fastest growing economies in the world.
High Inflation a Global Problem
India’s inflation remained well above RBI’s tolerance level in July as it printed 6.71% against the RBI mandate of 2% to 6%. While at the same time Inflation world remained around 10% and could remain elevated amid higher energy prices following supply disturbance from the Russia-Ukraine war.
India is having some positive and some negative aspects for domestic inflation. On the negative side higher commodity prices (especially crude oil rises on account of tight supply), further revision in GST rates, any excise duty hikes on fuel, higher food prices and depreciation in the rupee could push the bond yield higher while at the same time correction in food prices (in line with a fall in global edible oil prices, lower transportation costs and better monsoon progress etc), cut in fuel prices by state governments could help in trimming inflation.
We believe the core inflation could stay elevated and average between 6.1% to 6.3% in the current fiscal year.
Spot USDINR Outlook
Spot USDINR is expected to trade higher on a stronger dollar against major currencies. However, we don’t expect sharp depreciation from here following the expectation of a better macro environment going ahead. The pair is so far the median performer among the Asian currencies and is expected to remain the median performer for the rest of the year.
In the short term, we may see a level of 81 but may not sustain at that higher and could retrace and find a base around 79. We believe the pair is likely to trade in the range of 81 to 78.50 in the next quarter and average out around 79 odd levels.
(Dilip Parmar, Research Analyst, HDFC Securities. Views expressed are the author’s own.)