InvestorQ : Why is rupee nearly 83/$ and is it due to domestic or global factors?
Aditi Sharma made post

Why is rupee nearly 83/$ and is it due to domestic or global factors?

Mahima Roy answered.
1 month ago

During the last week, the week closed at the historically lowest level of Rs82.83/$. That is a lot of weakness in the rupee against the dollar. Let us look at some of the key reasons that have caused this sharp fall in the rupee. To answer your question, this is due to a mix of domestic and international factors that the rupee has weakened so much and so sharply. Here is a look at some of the key factors that have led to weakness in the rupee, especially the sharp fall in the last few months.

a) One of the major global factors that is weakening the rupee is the US Fed decision to stay hawkish. In the last 3 meetings, the Fed has raised rates by 75 bps each and it again plans to hike the rates by another 75 bps to nearly 4% in November. That is likely to strengthen the dollar.

b) That is already evident in the dollar index going to a 25 year high. As the dollar gets stronger, more investors would prefer to hold dollar assets rather than hold emerging market assets. In emerging markets like India, the weak currency wipes out most of their stock market gains.

c) There is one more important factor here and that is India not being included in the JP Morgan Bond Index in 2022. This move was supposed to get a deluge of flows from FPIs into debt. In fact, to be precise, this almost deprives India of $40 billion of potential FPI bond flows from passive funds.

d) Then there is the relative valuation issue. Most global brokerages are intrigued as to how India has held up in 2022 despite headwinds and they are now going underweight on India and shifting to other markets like Taiwan and South Korea.

e) To be fair, India has its share of domestic problems too. The merchandise trade deficit at $30 billion a month is just too steep to handle and promises to widen the current account deficit to closer to 5% of GDP.

f) The problem with the Indian trade deficit is that most of it comes from oil imports and that cannot be easily stopped or changed. India relies on imports for 85% of its daily crude needs. POL (petrol, oil and lubricants) imports alone, accounts for 50% deficit.

g) Amidst all these problems, RBI also faces the problem of depleting reserves. For instance, the forex reserves with the RBI have fallen from $647 billion to $532 billion in about 8 months as the RBI tried to defend the rupee. Clearly, there are just too many factors at play and the recession fears are also hitting dollar exports of India.