A weak rupee will drive up the costs of external borrowing as well as hedging for domestic firms. It may not spur exports meaningfully, given fears of recession in key markets, but it will continue to inflate the import bill, causing the current account deficit (CAD) to rise, economists said.
Once the psychological 80-per-dollar barrier is breached, the domestic currency may fall further, some of them said. Higher imported prices of raw inputs like coal will push up electricity costs, while elevated rates of imported fertiliser will inflate the government’s subsidy bill.
However, they also indicated that some amount of rupee depreciation is warranted for India to retain export competitiveness, as the currencies of the country’s competitors, too, have weakened against the dollar.
Pronab Sen, noted economist and former chairman of the National Statistical Commission, cautioned against aggressive intervention to defend the rupee. “This is because any such defence tends to build in expectations among foreign portfolio investors that the Indian currency will depreciate in future once the interventions are minimised. This could then be counter-productive.”
The RBI has stated that while it’s not targeting any particular level to rein in the rupee, it will ensure there is no “jerky movement”.
“This seems to be the right approach for the moment,” Sen said.
Bank of Baroda chief economist Madan Sabnavis said once the rupee touches 80 against the dollar, it will mean that “there will be further depreciation, as the market will assume that the RBI is okay with this movement”. “Forex risk perception will increase due to this untamed depreciation. It will make external borrowings less attractive when combined with higher interest rates overseas,” Sabnavis said.
Pressure on the foreign exchange reserves will be relentless, as the RBI keeps intervening and revaluation takes place with the dollar gaining against all currencies, he added.
Yes Bank chief economist Indranil Pan said: “While exports may not increase substantially, the imports will become costlier. Exports may not rise because, for a country like India, exports are driven more by global growth rather than the exchange rate. This will mean that bridging the current account deficit through higher exports may not happen.”
Firms that want to raise money abroad will turn more cautious and they have to hedge their currency exposure. “The external commercial borrowings that will come up for repayments will cause problems for the borrowers if they haven’t hedged for the currency risks,” Pan said.
Aditi Nayar, chief economist at Icra, said: “Amidst the rebound in crude oil prices and the expectation that the dollar will remain relatively strong in the immediate term, we expect that the rupee may weaken to 81/dollar in Q2FY23.”
“Subsequently, global sentiment and the direction of FPI flows will determine if the INR continues to depreciate in the remainder of the year, or if US recession fears eventually arrest the dollar strength,” Nayar said.
She added that some amount of rupee depreciation is required to protect export competitiveness, as many emerging market currencies have reported a deeper depreciation relative to the dollar, as compared to the rupee this year.
DK Pant, chief economist at India Ratings, said: “India is a net commodity importer. While exports will get a boost, however, the rise will be limited due to slower growth/recession in developed world. Weaker rupee will push up inflation and current account. In a scenario of continuous capital flight, currency will have a tendency to weaken further.”