Rupee at 80: The reasons why the rupee will keep sliding

Looking at the accumulation of events in the near-term horizon—continued interest rate hikes expected from the USA’s Federal Reserve Bank, withdrawal of portfolio investments from India, prospects of a global recession dampening demand, continuing high inflation and a prolonged Russia-Ukraine war—it might not be surprising if the rupee value continues to slide down, before stopping at 82-83 levels.

The rupee has also been sliding because the dollar has been appreciating. The Fed’s interest rate increases, and the heightened risk environment in the global economy, has forced investors to rush to safe-haven assets, which are dollar assets in this case. The rising demand for dollars and dollar assets has seen the greenback appreciate against all the major currencies. The dollar index—which measures the dollar’s value against six major currencies (euro, yen, pound, the Canadian dollar, the Swedish kroner and the Swiss franc)—has been appreciating since the beginning of the year. From a level of close to 95 in January 2022, the index is now over 108-levels.

Experts have long been asserting that the rupee is over-valued and due for a correction. The May values of nominal effective exchange rate and the real effective exchange rate—the latest data available from the Reserve Bank of India (RBI)—shows the rupee to be over-valued and due for some depreciation. It is likely that the July data will also reflect somewhat similar sentiments.

It will be prudent to take note of a few things related to the rupee’s moving exchange rate. One, this time a cheaper rupee will not automatically mean higher exports because the global economy is facing recessionary threats and may hunker down on demand growth. Second, a depreciating rupee makes imports costlier, thereby adding to the domestic economy’s inflationary pressures. Third, the RBI will continue to intervene in the currency markets but only to ensure minimal volatility in the rupee-dollar trade; the central bank is unlikely to use its foreign exchange reserves to defend the rupee endlessly. Fourth, expect foreign portfolio investors to hasten their process of withdrawal from the Indian markets as the same rupees will now fetch fewer dollars. If the expectation is that the rupee will continue to lose further value against the dollar, then some of the global portfolio investors might be seen rushing for the exit signs.

It is also true that a depreciating rupee will always fire a political debate. The Opposition is likely to point to a depreciating rupee as a sign of the government’s failed economic management. This is what even the current government actively preached when it was in Opposition not so long ago. But, the unkindest cut will probably come from within a section of the government which always viewed an appreciating rupee as a symbol of national pride and economic superiority. Hopefully, the government will reject all demands for untrammeled use of foreign exchange reserves to support the rupee’s value.

Read why the RBI trying to defend the rupee by selling dollars is a losing proposition