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Indian rupee better placed than EM peers, despite touching new low

For consumers, a weaker rupee pushes prices of imported items higher, but manufacturers may bear a greater brunt as the prices of imported raw materials may shoot up further.Premium
For consumers, a weaker rupee pushes prices of imported items higher, but manufacturers may bear a greater brunt as the prices of imported raw materials may shoot up further.

  • Fears of a slowdown in global growth amid upcoming interest rate hikes by the US Federal Reserve have dampened investors' sentiment towards emerging market currencies, including the Indian rupee.

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The Indian rupee hit a new low of 77.48 against the US dollar Monday, breaching it's previous low seen in March, following the escalation of the Russia-Ukraine conflict.

Fears of a slowdown in global growth amid upcoming interest rate hikes by the US Federal Reserve have dampened investors' sentiment towards emerging market (EM) currencies, including the Indian rupee.

Economists note that the due to a strengthening US dollar, other currencies like baht, Turkish lira, and ringgit have fallen more sharply than the rupee. The relentlessly selling of Indian stocks by the foreign institutional investors is also said to be at play here.

However, economists are of the view that the Indian rupee is in a better stead than other EM currencies. Thanks to the Reserve Bank of India's (RBI) intervention for that.

"The rupee has held up well relative to other EM currencies over past couple of months.

That’s despite the recent surge in some global commodity prices hitting India’s terms of trade," Adam Hoyes, assistant economist at Capital Economics Ltd said in a report on 9 May.

Hoyes points out that the latest data available on RBI's foreign exchange reserves indicates that the central bank has been intervening heavily to prop up the rupee, recently. So, he feels that the RBI is well-placed to intervene further if the rupee comes under more downward pressure.

Gaura Sen Gupta, India economist at IDFC First Bank was expecting the Indian rupee to touch 78/USD over the course of the year as Fed moves on rates. But with yesterday's new low, she feels it may happen sooner than expected.

"That said, the Indian rupee has been more resilient that other EM currencies so far. Also our externals are better than what they were during the 2013 taper tantrum. For instance, our current account deficit was around 5% then but is lower now," she added.

For consumers, a weaker rupee pushes prices of imported items higher, but manufacturers may bear a greater brunt as the prices of imported raw materials may shoot up further. In the backdrop of already high inflation, the rupee's sustained fall could add to woes of India Inc, which is struggling to take adequate price hikes to protect operating margin compression.

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