The rupee has lost about 6 percent of its value against the dollar since the beginning of this year, and the worrying trend has intensified significantly in recent weeks. This has prompted the Reserve Bank of India (RBI) to announce a series of measures to bring in a handful of dollars by liberalizing foreign exchange flows.
However, the question remains whether or not these measures will provide much-needed immediate support to the faltering rupee as inflation continues to rise and the current account deficit threatens to soar to multi-year highs.
VIEW OF THE RUPE
The rupee is likely to trade near historic lows in three months, according to a Reuters poll, as it is hit by widening trade and current account deficits.
Although the RBI’s intermittent dollar selling helped limit losses, higher global crude prices and steady capital outflows have widened its current account deficit, which in turn has dragged the rupee lower, according to a Reuters report.
Reuters conducted the survey of over 40 FX analysts between July 1st and 6th. The results showed that the rupee is expected to trade at around 79 per dollar by the end of September, with nearly a third of respondents forecasting a new historic low of 80 per dollar or more.
A HIT
While India remains the fastest growing major economy, a weaker rupee, stubbornly high inflation, elevated oil prices and the ongoing conflict between Russia and Ukraine pose the main downside risks.
As the US Federal Reserve continues its aggressive tightening cycle, the rupee could face a bumpy ride. Foreign investors have already withdrawn $13 billion from Indian equities in this quarter, the largest since 2008, taking total outflows to over $30 billion in 2022, according to Reuters report.
India’s trade deficit in June widened to a record high of $25.63 billion after crude oil and coal imports rose from $9.61 billion a year earlier.
However, RBI Governor Shakkanta Das has repeatedly asserted that the country’s current account gap is manageable.
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