Down about 6% against the dollar, it’s been a steady fall for the Indian rupee this year.
A widening current account deficit (CAD), worries over slowing growth momentum, panic reaction to rising US interest rates, higher demand for dollars due to improved outlook for the US economy and India’s rising oil imports bill have all contributed to the sustained pressure on the rupee.
All eyes are now on the Reserve Bank of India to see if it will follow Indonesia in raising interest rates, possibly as early as its next policy decision on June 6, to help calm financial markets amid an emerging-market rout.
India is part of the so-called ‘Fragile Five’ club - economies that are heavily reliant on foreign inflows and vulnerable to rising US interest rates. As bonds are being dumped and stocks and currencies weaken in EMs, investors have pulled out $3.3bn from India’s debt market, contributing to declines in the rupee, Asia’s worst performer this year.
India’s oil imports surged 41.5% in value terms to $10.4bn in April, according to official data as Brent crude averaged $71.76 a barrel. The country’s oil import bill is set to rise by 20% in the current fiscal year to $105bn compared with $88bn in 2017-18, according to one estimate.
India’s CAD widened to $13.5bn in the three months ended December from $7.21bn in the previous quarter. The shortfall could hit $19bn this year if the country ceases to attract substantial investment in equities and securities, according to analysts at Rabobank International.
HSBC Holdings estimates the CAD will widen to 2.3% of GDP in the 2019 fiscal year from 1.9% in the previous year.
With a plethora of problems weighing on sentiments, there’s no love left for the Indian currency. Kotak Mahindra Bank has gone so far as to say that the rupee could fall past its 2016 record low of 68.89 per dollar if global and local risks play out.
The rupee is expected to be traded at 64.88 by the end of this year, according to the median forecast of analysts surveyed by Bloomberg.
The Indian currency fell to a 15-month low after Prime Minister Narendra Modi’s Bharatiya Janata Party failed to gain a majority in a key state election. The result is seen heightening political uncertainty before a national election next year.
The health of the Indian economy tends to rest on two great factors: Monsoon rains and oil, says Mihir Sharma a Bloomberg columnist. While, these two are uncontrollable factors, the world’s third-largest oil consumer needs to play to its strength.
India should see a weaker rupee as a boost for its exporters. The government should follow up by slashing red tape and the tariffs that keep Indian companies from integrating with global supply chains.
Indian policymakers need to address the structural problems affecting the economy. As an EM, the country should nurture a significant home-grown investor base. Longer term, futuristic policy initiatives and structural reforms can help the country reduce its dependence on factors beyond its control.
