The rupee may cross 70 in the short-term, but only for a brief period, according to currency dealers and economists.
Even as the rupee hit a lifetime intra-day low of 69.09 on Thursday, the Reserve Bank of India’s (RBI’s) intervention brought it back to 68.36. It closed at 68.47 against the dollar, lower than its previous close of 68.79.
The main reason for rupee’s depreciation is rising oil prices, caused by the sanctions on Iran and flat production by other oil producing majors. The recent tariff war imposed on China, and the resultant depreciation is also working as a pressure point for the rupee.
Both the factors can be reversed, according to economists, particularly when European countries are working to ease off Iran pressure and the tariff war could end up hurting the US economy.
Importantly, when the European Central Bank starts raising rates, dollar is likely to depreciate. Besides, the current level is good enough for exporters to sell dollars, according to Harihar Krishnamurthy, head of treasury at First Rand Bank.
Currency dealers say the rupee is not showing an outlier movement, since it is losing steam along with other currencies in the region. In Asia, the rupee may have been among the worst performing currencies, but other emerging markets such as South Africa and South Korea have been hit badly.
The recent depreciation in the rupee is temporary, but not alarming, according to Care Ratings.
“This may not really be an alarming sign for the Indian currency when viewed against the background of what is happening to other currencies. Besides, the forex reserves are comfortable to absorb temporary shocks,” Care Ratings economists Madan Sabnavis and Sushant Hede wrote. “Non-intervention by the RBI at each stage could take the rupee past 69 and towards 70, as long as the geo-political situation remained tense,” it added.
A part of the currency movement happened because investors had to unwind their positions. But for a country like India, which has a twin-deficit problem and is heading towards a general election next year, the situation is tricky.
“Investors have started questioning the growth potential of a country like India, which is import centric and oil dependent,” according to an economist.
However, it does not mean that a weaker rupee would help boost exports. In fact, when the rupee was relatively stable in the past few years and the rupee’s real effective exchange rate (REER) was relatively stronger, exporters adjusted to a stronger currency. However, import bills also rose, widening the trade deficit. Theoretically, a stronger local currency should bring down the import bill.
“The exports dynamics are far more complex than just a currency being strong or weak. However, importer-led inflation is felt more in a country like India,” said the economist quoted above.
Economic Affairs Secretary S C Garg on Friday said India had enough firepower of foreign exchange reserves to fight a volatile rupee.
Garg said other tools were also available to stem the decline in the rupee. If needed, the government could raise funds through foreign currency non-repatriable (FCNR) deposits, sovereign bonds or other routes to increase forex reserves, he added.
"If we assess at any stage that we need to buttress or refurbish our reserves, the options are open," Garg said, adding, "the situation has not arisen."
Compared to a crisis in 2013, when the rupee depreciated to its then lifetime low of 68.8650 against the dollar, the current situation was much better, mainly due to higher forex reserves, services exports and inflow of remittances by non-resident Indians, Garg said.
He said any further rise in oil prices could further widen the trade deficit and put pressure on the rupee, but the situation was not clear at this stage. "We are not even certain what kind of a storm it is or even if it is a storm or whether it will turn out to be a storm."
Garg also said it was too early to say what impact the fall in the rupee would have on inflation.
“Although India’s current account deficit has widened, driven in part by the recent rise in oil prices, it remains modest relative to GDP and is largely financed by equity inflows, including foreign direct investment. India's significant build-up of foreign exchange reserves in recent years to all-time highs provides a support buffer to help mitigate external vulnerability risk,” Global rating agency Moody’s said.
“We believe that fundamentally the Indian rupee should hover around 68 per dollar but will remain volatile,” Care Ratings said.