How the rupee’s slide will impact India’s economy

Multiple forces have dragged the Indian rupee down, including the exit of foreign portfolio investors, the rising cost of international crude oil prices and a strong dollar. Mint explains the consequences of the decline of the Indian currency.

How low can the rupee go?

The rupee fell until mid-December 2021 amid concerns about the economic impact of the microwave wave, elevated crude oil prices and expectations of faster rate hikes by the US Fed. Subsequently, as the number of covid cases decreased, the currency showed signs of appreciation. The rupee came under pressure from late February in the wake of the war in Ukraine and the surge in oil prices. On June 13, the rupee hit an all-time low of 78.29 for the dollar. Market participants expect it to trade in the 79-80 dollar range, hitting 80 by the end of December.

What is the impact on inflation?

The Reserve Bank of India’s monetary policy report in April estimated that the rupee will trade at around $76 per dollar in FY23, adding that a 5% decline in this would raise inflation by 20 basis points. The rupee is already down 2% from this assumption, pointing to a deterioration in future inflation. RBI said that given the high volatility in financial and commodity markets, the pass-through from currency weakness to inflation will be non-linear and will vary over time. Indian inflation was previously expected to moderate this year as a result of the RBI’s measures, but the declining rupee will negate this benefit.

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What does a weaker rupee mean for businesses?

One, higher import costs. Second, Indian companies have borrowed from the offshore dollar market, and the stock of commercial loans stood at $226.4 billion at the end of December 2021. Interest payments are expected to increase. Fundraising through external commercial loans is also likely to decline.

Will the current account deficit widen?

The current account deficit (CAD), or when imports exceed exports, is expected to worsen. For a net importer like India, a weak currency is not good news. This worsens CAD, especially at a time of heavy FPI outflows. The CAD could hit 3% of GDP (vs CAD of 1.2% in April-December 2021) due to higher import bills and a decline in forex reserves as it is used to finance the deficit. Forex reserves stood at $596.45 billion on June 10. In the coming year, however, reserves may increase if exporters take advantage of the cost advantage.

What are the options before RBI?

India’s central bank has sold dollars from its reserves and bought rupees, which causes the supply of dollars to rise and that of the rupee to fall.

At the beginning of October, one dollar was worth a little more 74 and it is currently around 78. If RBI hadn’t intervened, the dollar could have hit 80 already. That said, RBI cannot continue to sell dollars as its forex reserves will be depleted at a faster rate. Since October last year, India’s forex reserves have fallen by about $40 billion.

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