Following the escalation of the Russia-Ukraine conflict, the Indian rupee on Monday hit a new low of 77.48 against the US dollar, the highest level seen in March.
Fears of a slowdown in global growth amid an upcoming interest rate hike by the US Federal Reserve dampened investor sentiment towards emerging market (EM) currencies, including the Indian rupee.
Economists say that due to the strengthening of the US dollar, other currencies like the baht, Turkish lira and ringgit have fallen more sharply than the rupee. Frequent selling of Indian shares by foreign institutional investors is also said to be a trend here.
However, economists believe that the Indian Rupee is in a better position than other EM currencies. Thanks to the intervention of Reserve Bank of India (RBI) for this.
“Rupee has been doing pretty well against other EM currencies in the last few months.
“Despite the recent jump in some global commodity prices affecting India’s terms of trade,” Adam Hoyes, assistant economist at Capital Economics Ltd., said in a report on May 9.
Hoyes points out that the latest data available on RBI’s forex reserves indicates that the central bank has been making heavy interventions recently to prop up the rupee. Hence, he feels that RBI is well prepared to intervene further if the rupee comes under further downward pressure.
Gaura Sen Gupta, India economist at IDFC First Bank, was expecting the Indian rupee to touch 78/USD during the year as the Fed moves on rates. But with yesterday’s new lows, he thinks it could happen sooner than expected.
“That said, the Indian rupee has so far been more resilient than other EM currencies. Also our externals are better than they were during the 2013 taper tantrum. For example, our current account deficit was around 5% then , but less is now,” he added.
For consumers, a weaker rupee pushes up the prices of imported goods, but manufacturers may incur more losses as prices of imported raw materials may rise further. In the backdrop of already high inflation, the continued depreciation of the rupee could add to the woes of the Indian industry, which is struggling to take enough price hikes to protect operating margin compression.