After testing the 69/$ level consistently over the last few weeks, the INR finally breached the 70/$ level during the week. Whether it will be a new normal, will have to be seen in the next few weeks, but the pressure on the rupee is undeniable. Here is why!
Global cues hold the key…
The trigger for the fall in the rupee was the global cues. More than the weak Turkish Lira, it was the dollar strength and the Yuan weakness that spooked the INR in a big way. The Yuan is already down nearly 10% in recent weeks. This opens the gates for full fledged currency devaluations. Most EMs has seen their currencies dropping value in the last few weeks although the INR has been among the worst among Asian markets. The onus will be now be on the RBI as to how it uses the interest rate mechanism to address the currency issue. With 2 rate hikes completed, the RBI may not have much leeway!
Watch the trade deficit
Forget about global cues, the focus should really be on the trade deficit. At $18 billion for July, trade deficit is a real challenge. It almost works like a vicious cycle with trade deficit weakening the rupee and the weak rupee further widening the trade deficit. In addition, the current account deficit (CAD) is also likely to get closer to the 3% mark; which is normally a worrying tipping point for the INR. Watch Brent!
RBI has few options
With its reserves depleted by $23 billion, the forex chest is less than 9 months of imports. Further RBI support to the INR looks unlikely unless the NRI bond issue gets through. With 2 rate hikes done, the RBI’s leeway to hike rates is also limited. The big challenge for the INR could be that the RBI may have limited options. Further weakness in the INR cannot be ruled out! ©