The rupee's rumination: How to decipher its value loss against $?

More regulatory and monetary measures are expected to tame inflation if the rupee extends losses against the US dollar. Most of the Rupee's anticipated depreciation looks over with many predicting the local unit to trade in the range of 79-82 this year. The RBI is said to be in touch with the Centre being watchful of every market movement, both globally and locally

The Rupee's recent slump against the dollar raises more questions than answers for a common man. With the local currency hitting lifetime lows, s/he is inundated with information galore but half baked. This fans a great deal of confusion. This is the time to ruminate over the rupee going beyond shallow boundaries!

The rupee hit a record low of 80.02 per dollar on Tuesday morning. This time however, the losses are not exactly exclusive to India. Blame it on the Russia-Ukraine war! The geopolitical conflict sent commodity prices soaring high. Consequently, developed economies like the US or Europe are experiencing record high cost of living. The US printed 9.1 per cent inflation in June, highest in 41 years.

Such phenomena are getting central banks including US Federal Reserve or the European Central Bank into act. Chances of sharper rate hikes by the Fed have brightened shortening the odds that the US will slip into recession.

Why is the rupee falling?

A bout of dollar outflows. Global investors have sold a net of over $31 billion local securities this calendar. This is in sharp contrast to $40.5 billion they had net invested in the calendar years 2019-2021, show data from the National Securities Depository Ltd. International investors are now seeking the safety of dollar-backed assets with US interest rates rising. They began to exit all other emerging markets such as Brazil, South Africa, China and Indonesia. The lure of the dollar overshadowed the high yielding emerging markets amid a pall of gloom. During 2022 the US Treasury benchmark yield rose to about 146 basis points. A basis point is 0.01 percentage point.

Rupee's relative performance

The rupee lost over 7 per cent this year ranking seventh in the pecking order for Asian currencies. Also, it has reportedly gained 2.80 percent against the basket of 10-11 world's heavyweight currencies including Euro, Pound and Japanese Yen. This is the best performance since 2015. It alone suggests that the local unit's losses are more linked to the global arena than local macro matters.

Is India immune to global crisis in the aftermath of Russia-Ukraine conflict?

Not really. It has its own set of problems. First, the trade deficit or excess of import costs over export value rose to a record $26.1 billion in June compared with $9.6 billion in the corresponding month last year. Second, its oil import bills are leapfrogging with every rise in the global crude price. New Delhi meets about four-fifth of its motor fuel requirements via overseas shipments.

Third, rising import bills fuels inflation, which the Reserve Bank of India is mandated to curb in a year when the North Block is borrowing a record sum from the capital market via debt sales. RBI is the merchant banker to New Delhi auctioning sovereign securities on its behalf.

Fourth, local companies have not started spending on capacity building in full swing yet. This dims demand outlook in the whole economy across sectors.

Regulatory steps

Both the government and the Reserve Bank of India are working in plugging gaps. At the beginning of the month the Centre imposed a windfall tax levy on domestic crude oil producers, slapped export duties on aviation turbine fuel, diesel and petrol. It hiked import duty on gold attempting to cut imports.

The RBI introduced the rupee-settlement system, a platform to encourage international trade in Indian rupees instead of US dollar. This could lead to annual savings of $30-36 billion reportedly. It paves the way for bilateral trades with countries like Russia, which can sell discounted oil amid global economic sanctions on it.

Besides, Mint Road has taken a five-point action plan to shore up forex reserves and cut the rupee's abrupt slide against the greenback. Those are aimed at bringing dollars to the country.

The RBI is extending its general market intervention through which select banks are seen selling dollars on behalf of the central bank. This has so far worked well in cutting the pace of the Rupee's fall.

Will they yield results?

It is evolving. It will take some time. With banks raising interest rates on their deposit plans for non-resident Indians, this could well be the first lure to attract Indian diaspora bringing in dollars.

A weaker rupee vs fragile economy

A weaker rupee does not necessarily point to a feeble economy subject to conditions like sovereign rating downgrade. If a falling rupee pinches importers' pockets, it also adds to exporters' coffers. An exporter earns more with larger per unit realisation of rupees.

Your daily life

So far the rupee's drop in value will make you pay higher to support your daughter pursuing higher study overseas. At the same, you may receive a higher sum, if she is settled offshore and regularly sending money back home in Hyderabad.

You have to pay a bit more to buy daily articles due to inflation, if fiscal calculations go awry due to rupee's tanking. Although it is unlikely as the inflation appears correcting as per stated trajectory by the RBI.

Way forward

More regulatory and monetary measures are expected to tame inflation if the rupee extends losses against the US dollar. Most of the Rupee's anticipated depreciation looks over with many predicting the local unit to trade in the range of 79-82 this year. The RBI is said to be in touch with the Centre being watchful of every market movement, both globally and locally.