The Rupee Plummeted To A New Record Low Of 79.38
The rupee on Tuesday plummeted to a new record low of 79.38 to the US dollar, amid sustained dollar strength & a record June trade deficit because of rising energy & gold import costs. Nearly one in three analysts expected it to weaken to 80 per dollar by September as twin deficits add to pressure on the emerging market currency. To prevent the slide in the rupee & shore up foreign exchange reserves, the Reserve Bank of India (RBI) Wednesday announced a range of measures, including relaxation in foreign investment in debt, external commercial borrowings, & Non-Resident Indian (NRI) deposit.
With the rupee depreciating 4.1 % to 79.30 against the US dollar in the current financial year till July 5, FPIs (foreign portfolio investors) pulling out Rs 2.32 lakh crore in six months, & $50 billion being shaved off forex reserves over the last 9 months, the measures are expected to further diversify & expand the sources of forex funding, mitigate volatility, & dampen global spill overs. Economists estimate that India's current account deficit, or excess of imports over exports, will touch 3.2% of India's GDP, up from 1.2% last year, further weighing on the domestic currency. The country’s trade deficit touched to a record $25.63 billion in June as increasing global commodity prices raised the cost of oil & gold imports.
Multiple Forces led to this fall, mainly due to a strong dollar overseas, foreign capital outflows & high crude oil prices. A robust dollar & weak domestic growth prospects are leading investors to flock to safe greenbacks, ditching riskier Indian assets. The strengthening of US dollar has been aggrandising as global investors piled on the safe-haven currency with the US Federal Reserve tightening monetary policy more than peers. Funds are now flowing back to the US due to risk aversion in global markets. The dollar index, which tracks the currency against a basket of major currencies, is up over 9% this year & hit its highest in 20 years. The rupee-dollar exchange rate gets impacted due to money flowing out of India, depreciating the rupee. A falling rupee exerts pressure on the already high import prices of crude & raw materials, resulting in higher imported inflation.
In a significant move, banks have temporarily been allowed by the RBI to raise fresh Foreign Currency Non-Resident Bank i.e., FCNR(B) & Non-Resident External (NRE) deposits without reference to the current regulations on interest rates, with effect from July 7. Availability of this relaxation too will be till October 31, 2022. In another measure, the RBI has taken a decision that category one banks can utilize foreign currency borrowing (OFCBs) to entities for lending in foreign currency for a wider set of end-use purposes, subject to the negative list set out for external commercial borrowings (ECBs). The measure is expected to facilitate foreign currency borrowing by a larger set of borrowers who is likely to figure it out difficult to directly access overseas markets. Further, from July 30, 2022, NRE deposits & incremental FCNR(B) with reference base date of July 1, 2022, will be exempt from the maintenance of cash reserve ratio (CRR) & statutory liquidity ratio (SLR). This relaxation added to the returns of NRI will be available for deposits mobilized up to November 4, 2022.
The global outlook is surrounded by recession risks. Consequently, financial markets have been gripped by high risk, producing surges of volatility, large spill overs & sell-offs of risk assets including flights to safety & safe-haven demand for the US dollar. As a result, emerging market economies (EMEs) are facing retrenchment of portfolio flows & persistent downward pressures on their currencies. However, Indian Rupee is still amongst the best performing emerging market currencies despite its recent fall. Out of the 19 currencies that depreciated against USD, the rupee was the seventh “best performer” , according to data analyzed by DBS. Despite headwinds from geopolitical developments, elevated crude oil prices & tighter external financial conditions, high frequency indicators point to an ongoing recovery in several sectors. India’s external sector has exhibited resilience & viability on the back of robust exports of goods and services and rising remittances. The current account deficit (CAD) is modest. All capital flows barring portfolio investments remain stable & an adequate level of reserves provides a buffer against external shocks. While RBI has been intervening to slow down the pace of rupee depreciation, it must utilize monetary policy to stem the rupee’s slide instead of burning its $590 billion forex reserve. Hiking interest rates with a decent possibility is the only way to counter rupee weakness for RBI that the hike can also come as a surprise announcement before the next policy date.