Home / News / India /  Indian currency continues to depreciate. How exports may miss benefits of weak rupee

Indian rupee weakens against the US dollar on the back of strong demand for the greenback from oil companies and bearish sentiment in domestic equities. Markets are preparing for another huge rate hike from the US Federal Reserve next week, and that has investors trading with a cautious bias. Sensex erased its over 60,000 mark, while Nifty 50 slipped under 17,900.

At the interbank forex market, the local unit closed at 79.6975 against the American currency --- declining by 0.32% compared to the previous day's reading. On Thursday, the rupee dropped to at least 79.7250 against the dollar before correcting.

Just like domestic equities, the rupee also halted its four-day gaining spree on Wednesday after a higher-than-expected US CPI print boosted the dollar and heightened expectations of another 75 basis point hike in key rate by the US Fed for the third consecutive policy.

The US dollar stayed firm and was around the 110 mark against a basket of currencies.

A foreign exchange dealer at a private bank said, traders do not expect any intervention till the 79.90 levels, so, based on that, oil companies have stepped in to buy dollars, as reported by Reuters.

The dealer added that there was a lack of inflows in the market compared to the past few sessions.

So far, in the calendar year, the rupee-dollar exchange rate in nominal terms has depreciated by more than 7% due to headwinds from tighter global financial conditions, risk-off sentiment, and a strengthening US dollar.

Meanwhile, on the domestic front, Sensex closed at 59,934.01 down by 412.96 points or 0.68%. Nifty 50 ended at 17,877.40 lower by 126.35 points or 0.7%.

Vinod Nair, Head of Research at Geojit Financial Services said, Defying the positive trend of global markets, domestic indices shed their early gains, dragged by losses in IT and pharma sectors, while mid & small caps outperformed. Fears of a recession in the global economy exacerbated selling pressure in IT and pharma stocks."

Nair added, "Globally, in light of the elevated inflation in the US, investors are on an edge, assessing the possibility of a higher magnitude of a rate hike in the next Fed policy meeting."

Foreign investors (FII) became net sellers on Wednesday by pulling out 1,397.51 crore from the equity market. The FIIs carried selloff after being net buyers for six consecutive days. On Tuesday, FIIs invested 1,956.98 crore in Indian equities, as per NSE data.

Exports missing benefits of weak rupee

On Wednesday, in its research note, Crisil said, "While a weaker rupee poses risks of imported inflation, it can also support India’s exports as our goods and services become cheaper for foreign importers. Thus, there are calls in some quarters for allowing the rupee to weaken further to make it more competitive, thereby supporting exports and acting as a natural stabilizer for India’s growth."

Crisil pointed out that it is not only the Indian rupee that has depreciated against the US dollar this fiscal but also most advanced and emerging market currencies.

According to the rating agency, the rupee’s depreciation sits somewhere in the middle of the emerging currencies’ pack. Among India's competitors, Vietnam’s currency has dropped relatively less by 1%, while the Chinese renminbi has depreciated much more (9%), and Bangladesh's currency has seen a double-digit decline (10.6%).

This is far less compared to advanced economy counterparts like Euro and the British pound which have depreciated by 11.7% and 17.6% against the US dollar respectively. Crisil highlights the advanced economies are expected to slow down much more owing to the impact of high inflation and their dependence on imported energy.

"A sharply depreciating euro against the dollar dampens the comparative advantage the depreciation of Indian rupee may have had on its exports to the EU. This is of significance because EU is the second largest export destination for India, and more than 39% of EU imports are invoiced in euro," Crisil's note explained.

In August, India's merchandise exports stood at $33.92 billion rising by merely 1.62% compared to the same month last year. However, imports too climbed but with double-digit growth.

India's imports rose by a massive 37.28% to $61.90 billion in August 2022 compared to a year ago same period.

That said, the trade deficit, which is the gap between exports and imports, widened to $27.98 billion in August 2022 -- registering an increase of a whopping 138.88% from $11.71 billion in August last year. Between April to August 2022, the trade deficit widened to $124.52 billion up by 131.52% from $53.78 billion in the corresponding period last year.

In Crisil's view, exports have contracted not just on-year in August, but sequentially in the past two months. The slowdown is coming from major trading destinations, viz. US, EU, and China (-6.4%, -3.1%, and -9.0% on-month, respectively.

It added, "depreciation of the rupee is expected to help exports of select goods and services (e.g. apparel, automobile, information technology, and enabled services)."

Overall, Crisil expects the impact of a slowing global economy on exports to overwhelm the mild positive impulse from rupee depreciation, acting as a drag on India’s economic growth this fiscal. And with slowing exports and a rising import bill (owing to elevated commodity prices and recovering domestic demand), Crisil expects the current account deficit to widen to 3% of GDP this fiscal.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less

Recommended For You

Trending Stocks

Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout