Indian Rupee | US Dollar: The Rupee Is Approaching 80 To The US Dollar, Here’s How It May Affect You
CPI inflation in the United States came in at 9.1% in June, above a consensus estimate of 8.8%. Following the hot reading, analysts are now betting that the Federal Reserve could hike a full point later this month after its larger-than-usual move in June.
Analysts fear a slowdown in the world’s largest economy could exacerbate outflow pressure. The rupiah has already fallen more than 6.5% this year amid fears of a global recession and deteriorating external balances that are fueling outflows.
The Indian rupee hit a record high against the dollar for a fourth consecutive session. While the Reserve Bank of India (RBI) has taken steps to reduce the decline, traders and strategists expect the rupiah to touch levels of 80 to the dollar in the near future.
What is the impact of a rising rupee on consumers
India being an import-dependent country, could feel the heat of a falling rupee in an inflationary environment, as it is likely to have a further impact on household spending decisions. Inflation concerns have impacted expectations and as such, second-round effects would prolong price pressures.
As payments for imports are made in dollars, a weaker rupee would raise the price of imported goods.
All in all, a weaker rupee might just boost inflation in the near term. Whether it’s electronics or packaged food (where petroleum is needed), consumers will have to pay even more for products imported in whole or in their components only.
Those sending money from abroad to India will have to spend more as the dollar strengthens and the rupee weakens. The US dollar has risen and is currently hovering around the highest level in over two years.
Studying abroad is expected to become expensive and the amount of fees is expected to increase after conversion.
What makes the rupee go down
India’s foreign exchange reserves are falling rapidly. According to data from the Reserve Bank of India, India’s foreign exchange reserves fell from $5.01 billion to $588.3 billion as of July 1. India’s foreign exchange reserves are now at their lowest level in over fourteen months. As the rupee continued to weaken, the central bank sold dollars in order to support the currency.
India’s growing trade deficit, coupled with capital outflows, poses new risks to the rupee.
Data shows that India’s external balances are deteriorating. “Going forward, the rupiah’s path is likely to weaken against the dollar due to deteriorating external balances,” Goldman Sachs Group wrote in a note earlier this month.
India’s trade deficit widened to a record $24 billion in May as global crude oil prices jumped even as exports slowed.
Over the past year, foreign investors have withdrawn more than $32 billion from Indian stocks, making it the worst performer in Asia after Taiwan.
RBI measures to curb the fall of the rupee
The Reserve Bank of India (RBI) earlier announced measures to bolster its reserves, including higher overseas borrowing limits for companies and simpler foreign ownership rules in government bonds. . The RBI said it preferred an orderly movement of the local unit.
Among other measures, RBI Governor Shaktikanta Das recently said that the central bank is intervening in all segments of the foreign exchange market, whether spot, forward or offshore. “As a central bank, we don’t like excessive volatility. Our guys in the trading room decide the strategy minute by minute.
Das also said the central bank is for an orderly appreciation or depreciation of the currency. “We don’t have a level in mind, but our effort is to ensure an orderly movement of the rupiah in both directions,” Das said at an event on Tuesday.
“I think we shouldn’t be obsessed with a certain level of the rupee, what we should be watching and as market participants we should be concerned about the pace of depreciation, if the RBI is running an orderly depreciation because Ultimately, given the fundamentals of the rupee, a depreciation bias will always remain,” Suvodeep Rakshit, Kotak Institutional Equities told ETNow.
It can be noted that the Indian currency is not the lone wolf. Among emerging market economies, the Indonesian rupiah, Chinese yuan, South African rand and Malaysian ringgit all weakened 5-6% against the US dollar in CY22.