The Indian rupee has come under intense selling pressure due to a perfect storm of global headwinds which analysts say will continue to pummel the currency in the months ahead.
In recent weeks, the Indian currency tested record lows and breached the 80 rupees per U.S. dollar level at least twice in July, recovering only after the Reserve Bank of India (RBI) stepped in to stem the slide.
The currency has since regained some ground and was around 79.06 to the dollar on Thursday.
The recent sharp declines prompted a swift response from policymakers to assuage concerns about a rupee sell-off, which could drive prices even lower.
Finance Minister Nirmala Sitharaman attributed the rupee’s depreciation to external reasons, in a written statement to parliament in late July.
Global factors such as the ongoing Russia-Ukraine war, soaring crude oil prices, and tightening of global financial conditions are among the key reasons for the weakening of the Indian rupee against the dollar, she said.
Analysts agreed the currency is being buffeted from multiple fronts globally.
India’s exposure to high energy prices has had knock-on effects on the currency, with the rupee falling more than 5% against the dollar year-to-date.
Soaring energy prices are especially challenging for India — the world’s third-largest oil importer — which typically buys oil in dollars. When the rupee weakens, its oil purchases become more expensive.
According to Nomura analysts, for every $1 increase in the price of oil, India’s import bill increases by $2.1 billion.
There’s been a “significant uptick” in Russian oil deliveries bound for India since March after Russia’s invasion of Ukraine began — and New Delhi looks set to buy even more cheap oil from Moscow, industry observers say.
Early data from June showed India’s supply of Russian crude reached nearly 1 million barrels per day, up from 800,000 barrels per day in May, according to investment advisory firm Again Capital.
“Usually, weaker currency acts as a pressure valve to restore external stability by making exports more competitive and reducing demand for imports by making them more expensive,” said Adarsh Sinha, co-head for Asia-Pacific forex and rates strategy at the Bank of America Securities.
“Oil imports from Russia, if settled in rupee, would reduce dollar demand from oil importers. These rupees could be used to settle payment for Indian exports, and/ or invested into India – both could be beneficial,” he told CNBC.
In July, India’s central bank put in place a mechanism for international trade settlements in Indian rupees. The measure allows traders to bill, pay, and settle imports and exports using the Indian rupee, which will help the long-term goal to internationalize the Indian currency, analysts said.
“This move is constructive for the rupee in the medium-term as higher Indian rupee demand for settlements implies lower demand for forex for current account transactions,” Radhika Rao, senior vice president, and economist at DBS bank, said in a recent note.
While a weak rupee puts pressure on India’s imports from other countries, it may help boost the country’s remittances from abroad.
Remittance flows to India grew by 8% to $89.4 billion in 2021, based on recovery in the United States, which accounts for a fifth of the country’s remittances, according to World Bank data.
“Remittances could be determined by many factors but [a] weaker rupee helps increase domestic value of those remittances which would help offset inflationary pressures for the recipients,” said Sinha from BofA Securities.
Goldman Sachs also said in recent note remittances to India “should remain resilient on the back of stable economic growth in the Middle East, benefiting from higher oil prices.”
As global conditions continue to remain in flux, the rupee will face further downside risks in the coming months, analysts said.
“With global capital flows drying up in a Fed tightening cycle, US recession risks coming to the fore, and India’s external balances becoming challenging, we are likely to see continued weakness in the INR going forward,” said Goldman Sachs Sengupta.
As a result, the bank forecasts the Indian currency could be around 80-81 rupees per dollar over the next 3 to 6 months, “with risks tilted towards even further weakness in the event of more acute dollar strength,” he added.
Other analysts even expect the rupee to test fresh new lows in the near term.
USD/INR Long (Buy)
Enter at: 79.8589