Amid US Fed rate hike, government not averse to weaker rupee vs dollar, says source | The Financial Express

Amid US Fed rate hike, government not averse to weaker rupee vs dollar, says source

The comments come against the backdrop of aggressive rate hikes from the U.S. Federal Reserve, which raised rates by 75 basis points overnight, vowing to battle to beat down inflation.

Amid US Fed rate hike, government not averse to weaker rupee vs dollar, says source
The Fed's decision sent the dollar to a new 20-year high and the rupee to a record low of 80.61. (Photo source: Reuters)

The Indian government is not averse to a weaker rupee in line with global market fundamentals, a senior official told Reuters, at a time when the central bank’s intervention has tried to moderate the depreciation in the Indian currency. The comments come against the backdrop of aggressive rate hikes from the U.S. Federal Reserve, which raised rates by 75 basis points overnight, vowing to battle to beat down inflation.

The Fed’s decision sent the dollar to a new 20-year high and the rupee to a record low of 80.61. “A weaker rupee in line with market fundamentals is not a cause of concern to us,” the government official, who did not want to be named, told Reuters late on Wednesday before the Fed’s rate-hike announcement.

“It can act as a natural stabiliser for the economy by helping reduce imports and maintain export competitiveness,” the official added. The finance ministry declined to comment. The Reserve Bank of India has been selling dollars to alleviate the depreciation pressure on the rupee due to the surging dollar and foreign portfolio outflows.

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The central bank sold a net of $19 billion from its reserves in July alone to prevent the rupee from falling much below 80. Alongside its intervention in the spot market, the RBI’s forward dollar holdings have fallen to $22 billion from $64 billion in April. “India’s current account deficit will hit 4% in the first quarter and remain elevated for the rest of the year. Given the Fed stance, flows will not be adequate for a couple of years. All this points to a structurally weaker rupee,” said Dhananjay Sinha, chief economist at Systematix Shares & Stocks. Sinha said the rupee is overvalued by about 5-5.5% on a real effective exchange rate (REER) basis.

Also read| Rupee likely to depreciate on strong dollar, risk aversion in equity markets; USDINR to trade in this range

India’s current account deficit likely widened to 3.6%, its highest in nine years, in the April-June quarter, driven by soaring global commodity prices and the biggest capital outflows since the 2008 global financial crisis, a Reuters poll found. RBI Governor Shaktikanta Das had said earlier this month that the central bank’s endeavour, amidst the extraordinary global events, has been to anchor expectations and allow the exchange rate to reflect the fundamentals rather than overshoot.

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