Rupee Outlook: US Fed rate hike - Rupee to remain under pressure, may test new levels

Indian rupee, which earlier this week touched an all-time low, is likely to remain under pressure and may test new levels as a fallout of the US Federal Reserve indicating more interest rate hikes, experts said.

The aggressive rate hikes will dampen demand and increase the possibility of a recession in the US. This could accelerate the pace of capital outflows, weaken the rupee and raise the threat of imported inflation.

The Fed rate hikes narrow the difference between the interest rates of India and the US, making India less attractive for dollar investment. This could lead to capital outflows, and coupled with elevated crude oil and commodity prices may depress the rupee further, experts said.

Also, there is a threat of imported inflation. Even if the global prices remain unchanged, a weaker rupee means India is paying more for its imports and thus higher inflation.

India is 85 per cent dependent on imports to meet its crude oil needs and 50 per cent for its gas requirement.

The rupee, which touched its all-time low of 80.15 against the US dollar in intra-day trade on Monday, rebouned by 39 paise on Tuesday to close at a nearly two-week high of 79.52 against the greenback.

On Wednesday, equity and forex markets are closed on account of Ganesh Chaturthi.

The Indian rupee has been under pressure following the outbreak of the Russia-Ukraine war in February. The Reserve Bank has been regularly intervening in the forex market to check volatility and arrest the declining value of rupee.

The country's foreign exchange reserves have come down from a high of USD 642 billion in September 2021 to USD 564.053 billion in the week ended August 19.

"The strengthening of the dollar will keep the rupee under pressure and the market can test new low levels for the rupee. However, RBI will be proactive enough to not let this be a steep slide and will ensure that volatility and slide of the rupee are minimised.

"Companies in export business always wait for such slides or slippages to recalibrate their hedge portfolios and target better realisation rates for their future cash flows," opined Hemal Shah, Business Consulting Partner, EY.

On the impact of sliding rupee on IT sector, P N Sudarshan, Partner and TMT Industry leader, Deloitte India, said the industry has been working under margin pressure and the exchange rate gains could relieve that pressure somewhat.

"Having said that the western economies, which are the largest buyers of our services, are facing unusual inflationary pressures and may seek to tighten their belts a bit. Hence while this arbitrage may relieve some immediate pressure, it is unlikely to translate to a windfall for the sector," said Sudarshan.

Annual sales growth of Information Technology (IT) companies, which remained steady in positive terrain even during the COVID-19 pandemic, stood at 21.3 per cent during the first quarter of the current fiscal, as per a Reserve Bank data on the performance of the listed private non-financial companies.

Ranen Banerjee, Partner - Economic Advisory Services, PwC India, said the stated position of the RBI is to smoothen volatility and not to defend the rupee.

The strengthening of the dollar index DXY on the back of over-hawkish messaging from the US Fed Chair is leading to pressure on all currencies including the rupee, he said.

"While we may expect pressure on the rupee because of the higher US yields, it will also get support from the consequent downward pressure on oil prices and other import articles and commodities as a result of expected demand slowdown from a longer duration of high interest rates being maintained by the US Fed," he added.

The rupee has weakened by 7.63 per cent against the US dollar since January this year.

Sliding rupee makes imports costlier, said B V Mehta, executive director, Solvent Extractors' Association (SEA) of India.

According to him, it will hit imports of edibile oil and the prices in the domestic market may rise to "some extent". India imports about 60-65 per cent of edibile oils to meet its domestic demand.

Sanjay Bhutani, Director, MTaI, said that the devaluation of rupee against the dollar may further worsen the already challenging turf for the med-tech sector.

"The government has so far played a nurturing role by handholding the industry as well as removing some of the redundant compliance burdens. We request the government to also play a protective role for the med-tech sector, by reducing the high tariff duty on medical devices to offset the effects of rupee depreciation," he said.

On the other hand, Santhosh Kumar, vice-chairman of Anarock, property consultant, was of the view that the Indian rupee dipping to a record low against the US dollar provides a great opportunity for NRIs eyeing long-term real estate investments in the country.

"While the depreciating rupee surely is a great opportunity for the long term, it may not be so in the short-term considering that India is an integral part of the global economy, and the exchange rate fluctuates significantly based on external factors.

"So, in the short-term, the currency difference spread advantage for the NRIs may be just wiped off or even lead to losses, and one must be cognizant of this before purchasing any asset," Kumar said.