Rupee approaching 80/USD, time for damage control?

By Rajesh Mehta & Sandesh Dholakia Planning to get the iPhone 14 in the coming months from your cousin in the United States? Time to realign your mental calculations from 70 to 80 to figure out the INR value that you will have to wire him/her. The rupee has been steadily falling with no signs of revival in near future. The Indian currency touched 79.

37/Dollars during the weakest ever session and fell over 5. 4% since the start of the year because of evolving concerns like rising trade deficit owing to high crude oil prices, foreign investors pulling out money, interest hikes in the USA, inflation owing to supply chain concerns from the never-ending Russia-Ukraine conflict. First, let’s understand the dynamics of how a currency like INR fall against another currency, USD is the case here – The easiest way to understand this is to draw an analogy with any normal good, let’s say onions, almost every year during months from October to December we hear instances of massive price rise in the commodity, the reason behind it is simple, the demand for onions during such days far outweigh the supply of it, the same case applies to currencies for any country when the demand for a currency (because of the country’s fundamental conditions) falls, market participants degrade the value of it and thus one needs to pay higher per-unit cost while exchanging it for any other nation’s currency.

But, why does the demand for INR fall in the first place?The fall can be broadly associated with the following reasons Rising Trade Deficit India has been a long net importing country meaning it demands goods in the foreign currency more than it sells in domestic currency, which implicitly reduces the demand for the Indian Rupee, this has become even more concerning now as the trade deficit keeps widening primarily due to elevated crude oil prices as a by-product of Russia-Ukraine conflict. The latest figures as per the Ministry of Trade & Commerce shows the trade deficit widening by 1215% YoY from +1. 38 USD Bn in May 2021 to -15.

44 USD Bn in May 2022. Foreign Institutional Investors quitting IndiaNational Securities Depository Limited (NSDL) compiled data shows FIIs pulling out a whooping USD 33. 5 Bn from equities and USD 2.

1 Bn from debt segments over the period October 2021 to June 2022. Such a magnitude has never been witnessed before, not even during the 2008 Global Housing Crisis. Capital outflow at such a massive scale dents currency’s value to a great extent.

When Foreign Portfolio Investors invest in Indian equity and bond markets, the returns are measured in Dollars, such case if the rupee depreciates against the USD, the value of the investment also plunges in-turn nudging FPIs to engage in distress sale of funds. A part of the reason for the outflow of money from Indian markets has also to do with investors finding a haven in developed economies, recent interest hikes by Fed incentivize investors to get more returns in a less risky economic environment. Strengthening Dollar Index (DXY) –The dollar index which measures the value of the US Dollar against currencies like the Euro, Swiss, Franc, Yen, Canadian Dollar, Pound, and Swedish Krona has been at strong levels since the start of the year.

The index measures the strength of USD in global markets, meaning, that when DXY rises, the value of all dollar-denominated assets also rises, benefitting American firms, US Bonds, etc. whereas on the split side this in-turn comparatively hampers other economies, particularly those in emerging markets as investors tend to flee much quicker given the risk spreads. At such a juncture, it would be unfair to not evaluate Rupee’s comparative performance against the USD visa-a-vis other major currencies.

While Indian Rupee has fallen by 5. 4%, other major economies like China, Canada, the EU & Japan fell by 3. 4%, 4.

7%, 13. 9%, and 18. 5% respectively.

Time for damage control! To absorb excessive selling pressure on Rupee, RBI keeps selling dollars to buy INR against them, even such a measure didn’t help retain the rupee’s strength and the RBI forex reserves are down to 593 USD Bn on 24th June from its all-time high of 642 USD Bn in Sep 2021. Somewhat like a chicken-egg problem, depleting reserves further put pressure on already deprecating INR. Apart from this, the very recently announced measures by RBI like increasing overseas borrowing limits for companies and liberalized norms for foreign investments in government bonds, removal of the cap on the interest rate that lenders can offer on foreign deposits by NRIs, and macro-prudential short-term limit norms for FPI investment in government securities and corporate debt under the Medium-Term Framework (MTF) are looked forward to.

Who gets affected the most?While it is all those who buy goods and services in USD are going to get affected there two major segments which shall hamper the nation the most, education & technology growth. The students going abroad are on a road to facing double brunt as inflation has already risen tuition fees and further currency exchange will become more troublesome whereas, for tech, India is still mostly importing all its tech needs which in coming times is bound to become more expensive in-turn hampering the country’s growth, needless to say, all in an environment when start-up ecosystem has seen a funding crunch affecting the overall productivity of the country. While there have been scholarships like Kalam Climate Fellowship, JN Tata Endowment, Nehru Master’s Fellowships, etc.

the base it caters to is very small and students are left with no option but to go into debt-heavy education, Govt. needs to divert its focus with urgency to find relief measures at-least for a short duration to enable families to bear the unproportionally high burden. Whereas to fill in the dent for the probable slowdown in tech growth, the focus needs to be realigned with urgency towards Make in India & Start-up India schemes in a manner that provides easy access to funding the most creative solutions promptly.

  Back in 2013, Prime Ministerial candidate, Narendra Modi started his campaign with a push back to opposing UPA thrashing them over the rupee deprecating to Rs. 65/USD and the then Govt not being able to control inflation as poor citizens weren’t able to eat food as prices remained elevated, fast forward to today even though Macros have changed quite a lot, Govt’s initiatives to control depreciating rupee has surely missed the mark and created a troublesome situation today. It is high-time for all relevant stakeholders to take a stock of the situation and create an efficient coordinated plan.

(The authors – Rajesh Mehta is a leading consultant & columnist working on Market Entry, Innovation & International Affairs. Sandesh Dholakia is the founder of Case Ace and a Strategy Consultant. Views expressed are personal and do not reflect the official position or policy of Financial Express Online.

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