When Rs 80. what to expect if you cross

Given the accumulation of events over the near-term horizon – expected interest rates hike from the Federal Reserve Bank of the United States of America, withdrawal of portfolio investments from India, slowdown in global demand slowdown, sustained high inflation and prolonged Russia-Ukraine War Possibilities – Before stopping at 82-83 levels, it may not be surprising if the value of rupee keeps falling down.

The rupee has also depreciated due to the strengthening of the dollar. Fed interest rate increases, and the heightened risk environment in the global economy have forced investors to turn to safe-haven assets, which in this case are dollar assets. Rising demand for the dollar and dollar assets has led to an appreciation of the greenback against all major currencies. The dollar index – which measures the value of the dollar against six major currencies (euro, yen, pound, Canadian dollar, Swedish kronor and Swiss franc) – has been appreciating since the beginning of the year. From the level of close to 95 in January 2022, the index is now above the level of 108.

Experts have been insisting for a long time that the rupee is overvalued and needs improvement. The May value of the Indicative Effective Exchange Rate and the Real Effective Exchange Rate – latest data available from the Reserve Bank of India (RBI) – show the rupee to be overvalued and prone to some depreciation. The July figures are likely to reflect similar sentiments.

It would be prudent to note a few things related to the moving exchange rate of the rupee. One, a cheaper rupee this time will not automatically mean higher exports as the global economy faces the threat of recession and may hunker down on demand growth. Second, a depreciating rupee makes imports costlier, adding to inflationary pressures on the domestic economy. Third, the Reserve Bank of India will continue to intervene in the currency markets but only to ensure minimal volatility in rupee-dollar trading; The central bank is unlikely to use its foreign exchange reserves endlessly to protect the rupee. Fourth, expect foreign portfolio investors to speed up their exit from the Indian markets as the same rupee will fetch less dollars now. If the rupee is expected to continue its depreciation against the dollar, some global portfolio investors may be seen running for exit signals.

It is also true that the fall of the rupee will always spark a political debate. The opposition may point to the rupee depreciation as a sign of the government’s failed economic management. The same thing was actively propagated by the present government when it was in opposition not so long ago. But, the ruthless cut would probably come from within a section of the government, which always viewed a valuable rupee as a symbol of national pride and economic superiority. The government is expected to reject all demands for free use of foreign exchange reserves to support the value of the rupee.

Read why RBI is trying to save the rupee by selling dollars.

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