InvestorQ : Why is the Indian rupee under so much pressure?
Dia Deshpande made post

Why is the Indian rupee under so much pressure?

swati Bakhda answered.
3 weeks ago

Yes, the rupee is weak and it is also weakening. Back in January 2022, the rupee was at about 74/$ and by June 2022 it has weakened by 5.2% to 78/$. Most forex traders are now talking of levels of 80-81/$ on the Indian rupee. It may not be as bad as the carnage of 2013, but it is putting a good deal of pressure. But let us address a more fundamental question on why weak rupee is negative for the Indian economy.

Let me now address a more fundamental issue; why is the weak rupee a concern for India? There are several reasons. Firstly, India runs a trade deficit of $20 billion per month or around $250 billion annually. A weak rupee naturally widens the trade deficit. Currently, India imports 85% of crude and coking coal. A weak rupee also imports inflation. Lastly, it depletes ROI. A 15% fall in Nifty plus 5% fall in rupee is equal to -20% returns.

Let me now turn to the core question of why the rupee is so much in the red. Here are some factors that triggered the weakness in the rupee.

· In the last one year, Crude oil rallied from $70/bbl to $130/bbl. That is largely thanks to the Russia Ukraine war which disrupted global supply chains. Sanctions on Russia hav meant that it takes away 10% of global supply. With little investment in fresh oil, demand has outstripped supply and India still depends on imports for 85% of crude.

· FPIs have sold more than $27 billion in equities since October 2021 with $23 billion of selling in the calendar year 2022. This is more than the selling during the COVID pandemic, Domestic flows have been strong but remember that FPI selling impacts large caps and heavy weights and also hits the rupee.

· The impact of the hawkishness is evident in the Bloomberg Dollar Index (DXY) spiking from 95 to 105, a level last seen 20 years back. Aggressive rate hikes imply greater flows into dollar assets and that makes the dollar stronger. This has been one of the key reasons for the weakness in the rupee.

· One factor, most of us miss out in the rupee weakness story is the spiralling current account deficit spiking to 5% of GDP. Currently, it is close to 2% of GDP. Current account deficit is like borrowing for your morning breakfast. In FY21, India had a current account surplus which slipped into a deficit in FY22. High current account has led to a run on the rupee as well as the risk of potential sovereign downgrades.