Will the Indian Rupee be Under Pressure this Week?
In the first week of September, the USDINR exchange rate stood at Rs.72.99/$. The rupee has now weakened to Rs.73.63/$. That is sharp weakening in a short span of time. What exactly has triggered this weakness and what is the likely outlook for the rupee? Will it weaken further?
I. The biggest risk is crude oil. India relies on imported crude to meet 80% of its daily crude needs. There was some hope last month when Brent Crude prices tapered to $67/bbl. However, by mid-September, Brent is back at $74/bbl and the spurt in demand and supply restrictions will keep oil prices elevated. That is likely to put pressure on the rupee, especially if you consider that trade deficit was $13.81 billion in Aug-21.
II. The FOMC meet will be a key factor that could put pressure on the Indian rupee. The US Federal Reserve has already hinted, through Jerome Powell’s speech at Jackson Hole, that the taper would commence by end of 2021. If the Fed gives a clear timetable for taper and rate hikes, it could strengthen the dollar index and weaken the rupee.
III. The Evergrande crisis could be a rupee dampener. If China hard lands due to the crisis, then PBOC is likely to let the Yuan weaken. The impact will be felt across Asia and India would be no exception. We saw in September 2015, how broadening of the Yuan range led to a sharp fall in the INR. That is a key risk in the next few days.
IV. Foreign portfolio flows are the cause and the outcome of weak rupee. Hence it normally acts as a vicious cycle. If the Fed hints at an aggressive taper, there could be a surge in FPI outflows, putting pressure on the rupee.
The redeeming features it that the RBI sits on a currency chest of $641 billion, giving enough ammunition to support the rupee in a range. As ICRA has outlined, it could be a worst-case scenario of Rs.75.50/$ by next year; not beyond that.
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