Depreciation of the Indian rupee continued this week amidst a strong dollar and consistent foreign funds outflow that offset the support from gains arising from bullish domestic equities. On Friday, the rupee closed at 79.25 against the US dollar down by 12 paise from the previous close. The local unit has touched a series of all-time lows in the interbank forex market in the past weeks. Experts believe the rupee may r under pressure as long as the dollar remains above 102 and crude prices over $90 per barrel.
Anand James – Chief Market Strategist at Geojit Financial Services on the current performance said, “While evaluating the prospects of 78.6 we had lined up dips to 78.95 to prompt upswings to 79.17. Though such a move evolved on anticipated lines yesterday, the upswings extended to 79.25, which ended up attracting liquidation pressure, and we are back in the consolidation band of 79.17-78.95, with only a mild expectation of a breakout.”
“Rupee traded weak this week breaching all-time lows below 79.25 as dollar index rise near 107$ gave push down to rupee,” Jateen Trivedi, VP Research Analyst at LKP Securities said.
For the upcoming week, Trivedi said, “global recession along with uncertainty over returns from risky assets set rupee in downtrend. Rupee can continue weakness till the time dollar index stays above 102$ & Crude prices above 90$ dollar index at almost 2 decade high shall keep added pressure on rupee.”
Amidst a weak rupee, India’s forex reserves have taken a hit. The foreign exchange (forex) reserves have declined by $5.008 billion to $588.314 billion in the week ending July 1 compared to the previous week, due to a steep downturn in foreign currency assets (FCA). All components in the reserves have tumbled.
As per RBI data, FCA reserves plunged by $4.471 billion to $524.745 billion in the week under review. Further, gold reserves dipped by $504 million to $40.422 billion in the week, while SDRs dived by $77 million to $18.133 billion.
Meanwhile, the country’s trade deficit touched a fresh record of $25.63 billion in June 2022 widening from $24.3 billion in May 2022. From April to June 2022, the trade deficit stands at $70.25 billion, as per the latest data. In June 2022, India’s merchandise exports stood at 37.94 billion – taking the total to $116.77 billion in Q1FY23. On the other hand, imports climbed to $63.58 billion in the month under review and cumulatively stood at $187.02 billion in Q1 of the current fiscal.
Furthermore, this year, as of July 8, FPIs outflow in the Indian market stood at ₹2,31,708 crore. From the total, equities were worst hit with an outflow of ₹2,21,454 crore, while a selloff to the tune of ₹14,341 crore was seen in the debt market so far. However, FPIs were buyers in debt-VRR and hybrid instruments with an inflow of ₹14,341 crore and ₹2,240 crore as of now.
Dr VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services also said, “If the trade deficit continues to remain high, further depreciation of the rupee above ₹80 to the dollar is likely in the next 2 months. FPIs are likely to wait and watch for rupee movements before buying big in India.”
Earlier, this week, Yes Bank analysts in their Ecologue report said the widening of the trade gap to fresh record highs only increases the concern around the strength of India’s external account to withstand such increases.
In their note, Yes Bank’s analysts stated that they consider 3-scenarios for India’s current account balance with average oil prices at $100 per barrel, $110 per barrel, and $120 per barrel in FY23. The note added, “Despite some buffer being expected on the invisible inflows, FY23 CAD is likely to be higher at $93-111 bn in FY23 ($47 bn in FY22). As a % of GDP, CAD is likely at 2.6-3.2% in FY23. As such, weakening external balances, increase in FII outflows, the decline in import cover, tightening by AEs, is expected to build downward pressure on USDINR.” Thereby, the analysts here expect the rupee to reach the 81 per dollar mark by March 2023 end.
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