Rupee under pressure: Check causes, factors responsible | What should exporters, importers do - Expert's opinion

The Rupee has depreciated about 3.3% against the Dollar since 1st September. During this period a broad gauge of Asian currencies has depreciated about 1%. September actually saw a net inflow in domestic debt and equity of about USD 3.5bn, and outflows from domestic equities and debt in October so far have not been too alarming either. Abhishek Goenka, Founder & CEO IFA Global, shares his knowledge and answers a number of questions about why is rupee under pressure, causes and factors responsible and what should exporters, importers do in this scenario.

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Explaining what is causing the Rupee to underperform, Abhishek Goenka, said, "We believe it's a combination of several factors: 1) Higher Energy Prices: We saw a record trade deficit in September ~USD 23bn. Typically one expects the monthly trade deficit to be around USD 13-15bn. The much higher than expected trade deficit was primarily on account of spike in Petroleum imports and can be attributed to preemptive purchases given global supply concerns. An increase in Crude prices by USD 10 per barrel increases our import bill by USD 1.2bn a month and USD 14.4bn a year.  2) A central bank that is relatively more dovish compared to other EM central banks: The RBI maintained status quo as far as policy rates and stance is concerned. The RBI is therefore trailing other EM central banks as far as removal of exceptional monetary policy accommodation is concerned. This coupled with inflationary concerns makes India's real rates less attractive compared to se of the other EMs. We are therefore seeing offshore carry positions get unwound in USD/INR as carry has become less attractive. We are seeing the spillover effect of this offshore unwinding on onshore spot. 3) Asymmetric intervention by the central bank: INR was relatively overvalued and volatility was close to multi year lows until a few weeks ago. The RBI therefore seems to be content seeing the overvaluation get corrected and has not intervened too aggressively by Selling Dollars. Higher USD/INR bodes well from RBI's balance sheet standpoint as well."

Opining about should one expect the underperformance in Rupee to continue, Goenka said, "We believe the underperformance should be limited from current levels if there is no run away up move in crude.  CNHINR is at record highs of close to 11.70. The passthrough impact of a weak INR on inflation is certainly something the RBI would be wary about. The RBI has a significant FX Reserve buffer to act to curb volatility if it so chooses. Persistent elevated volatility in the Rupee would be counterproductive to the endeavours so far of portraying India as an attractive investment decision, especially given the quest for index inclusion. We could see further depreciation in the Rupee if broad Dollar continues to appreciate, but we believe the Beta of USD/INR should reduce from here on. We expect the Rupee to trade a 73.90-76.90 range till FY22 end."

Advising on what should importers and exporters do, Goenka says, "Exporters can look to add to hedges between current levels and 75.90 while staying within the upper limit of documented hedging policies. Exporters can consider hedging a part of their anticipated exposures on upticks towards 75.90 through Risk Reversals so as to lock in spot."

"Importers are advised to cover their exposures up to 3 months through Risk Reversals at current levels given that the vols are still not greatly skewed towards calls at this point. Importers can look to hedge through forwards on dips to 74.30-74.60," Goenka concluded.

Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.