Blow to Indian rupee, set to plunge to 71 mark vs dollar; here is why

Indian rupee could be headed towards a new normal of over 70 against the US dollar as pressures from a possible devaluation of Chinese yuan amid escalating global trade war, import imbalance, reducing foreign portfolio investment (FPI) into emerging markets, firm crude prices and other such threats mount.

On Friday, the domestic currency fell to a record intra-day low of 69.12 against the US currency after the plunge in yuan.

Almost all the economists DNA Money spoke to gave a guidance of rupee breaching the mark of 70 vis-à-vis dollar in the short term as headwinds continue.

They said had India built oil reserves during the time when crude prices were ruling low, it could have softened the blow from rising oil prices on the import bill. Some of them even felt that the drastic reforms undertaken by the government over the last five years had failed to boost export growth, keeping trade deficit high. These factors, according to them, are taking the rupee down.

On Sunday, Brent crude rose 53 cents to $73.11 a barrel.

Amit Kumar Sarkar, partner, Grant Thornton India LLP, said while there weren’t enough earnings in foreign exchange due to lagging exports growth, the demand for US dollar to pay for higher crude prices had shot up significantly.

This, he said, was lowering the rupee’s value. At the same time, Sarkar feels dollar was firming up due to abundant capital flowing into the US market because of rising US yields and favourable tax amendments by Trump administration. 

“All this means that 70-71 will be the new normal for the rupee against the US dollar,” said the Grant Thornton executive.

D K Srivastava, chief policy advisor, EY India, backed Sarkar’s outlook for rupee in the near future. He expects crude to firm up a bit more. This, along with a weaker rupee, could see imports growth outpacing exports. 

“It might remain above 70, but I don’t think that by itself is a cause of concern. Inflation is also going up compared to other countries in relative terms; this could also see rupee depreciate more,” he said.

A major risk that could see rupee sink below 70 is the possibility of rumours of Chinese yuan being devalued coming true. There is a buzz in the market that China could devalue its currency to offset the impact of any US trade curbs on its exports.

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“We are hearing China could devalue its currency again, and if that happens, there will be a flutter in international currencies which have exposure to yuan. In such an event, India would be forced to accept correction in its currency, which could end up lower relative to the dollar,” said Sarkar.

An economist with a leading management consultancy firm, who works closely with policymakers, said there were many in the government and Reserve Bank of India (RBI) who believed rupee was still overvalued compared to currencies of rival countries, and therefore, could be allowed to fall more before they intervened. 

“There is a belief in policymakers’ circle that rupee is overvalued in real terms if you compare it with India’s rival currencies. There is not going to be full-fledged intervention till the threshold set by policymakers for rupee is crossed,” the economist told DNA Money on condition of anonymity.

According to the economist, further weakening of rupee will make imports more expensive, and if exports performed below expectation, then the current account deficit (CAD) could take a major blow.

Source: DNA Money