Experts anticipate the currency could slide past 88 to the dollar, while the Reserve Bank of India (RBI) limits its intervention to curbing excessive volatility rather than defending any specific currency level. The rupee gained five paise against the dollar to close at 87.63 on Thursday, with market participants pointing to likely RBI intervention through some large banks.
“The fact is, that there is going to be an immediate term impact on the economy, and therefore, on the currency,” said Dipti Deodhar Chitale, chief executive at treasury risk consulting and forex risk advisory company Mecklai Financial Services.
Volatility check
According to Chitale, the RBI will keep intervening to absorb flows and curb excessive volatility; and the rupee will remain under pressure and possibly touch 88.2 to a dollar, potentially as early as a fortnight. “I understand that the RBI was believed to be present in the currency market today through some large banks, at around 87.69 level,” said Chitale.
According to Chitale, the RBI needs to let the rupee weaken so exports remain competitive, and that is something the current dispensation at the central bank has not shied away from. “Under the new governor, RBI is now intervening only against wild swings and not to target any level,” she added.
US President Donald Trump has imposed 50% tariffs on India, including a 25% levy for buying Russian oil. The punitive tariff came into effect on 27 August. As per data compiled by Barclays, the US has the highest import tariff on India, followed by regional peers China at 30%, and Vietnam and Sri Lanka at 20% each.
“Courtesy of the tariff, the loss of exports will be to the tune of $20 billion or half a percent of gross domestic product (GDP),” said Sujan Hajra, chief economist and executive director, Anand Rathi Group.
Heat on CAD
FPIs have net sold ₹2.1 trillion worth of Indian shares in the secondary market since November till Tuesday, data from the National Securities Depository Ltd showed.
Higher tariffs on exports to the US and the resulting decline in trade are expected to widen India’s current account deficit by half a percentage point. Hajra said that a one percent increase in current account deficit—when imports surpass exports—results in a 5% fall in rupee, and this is why the domestic currency is expected to depreciate by around 5-5.5% against the annualized 3% every year for the past three years.
Troubles have mounted for India’s small businesses, after challenges from the implementation of the goods and services tax (GST) and covid-19. Sectors like textiles, jewellery, apparel, seafood, machinery and mechanical appliances, chemicals, and auto components are expected to bear the brunt of Trump’s tariffs. Economists estimate India’s growth rate to decline 20-30 basis points on the back of these tariffs.
Some said the rupee’s depreciation since the beginning of the year could not have come at a better time. The rupee has been the worst-performing currency among peers, weakening 4.2% since 1 November, days before Trump won the US presidential election, Bloomberg data showed.
Much discounted
“The Indian rupee has currently discounted a lot of what is happening on the trade front because it is one of the weakest currencies among peers. Rupee has enough cushion as far as relative performance is concerned,” said Anindya Banerjee, vice-president, currency derivatives and interest rate derivatives at Kotak Securities Ltd.
“I think the RBI will protect the 88-level for rupee and on the downside, I don’t see big appreciation beyond 86.8. However, if it (dollar) breaks above 88, it will be because of some kind of global risk but the pace will be contained by the RBI.”
Banerjee is hopeful that the overall economic impact of the tariffs would not be significant. “We all know how the Trump administration keeps flip-flopping on their trade decisions, using it as a negotiating tool,” he said. He is also pegging his optimism on RBI governor Sanjay Malhotra pledging support for growth and to sectors impacted by the tariffs earlier this week.
“RBI has made it clear that they will not be a mute spectator. This means that they would be not only giving ample support to the sectors and to the economy, but will also be present in the forex market. That is exactly what we are seeing today,” said Banerjee.
Meanwhile, others also see the rupee hitting 88 against the dollar. “Rupee targets are unchanged as of now at 86.5 to 87.5 for the next three months with a worst case of 88, based on RBI action,” said Madan Sabnavis, chief economist, Bank of Baroda.
