The rupee may see itself touching 80 over the next one year

22 Jun 2022 CW Team

India’s rupee has witnessed around 5 per cent depreciation year to date (YTD) in 2022 and 6.5 per cent year on year (YOY) with the performance somewhere in the middle of the emerging market group. This is in the context of dollar strengthening by ~10 per cent YTD. The pressure on the rupee has been building largely from October 2021, primarily driven by two aspects:
a) Rising crude (and commodity) prices driving a higher current account deficit
b) Tightening of rates by the US Federal Reserve leading to a risk-off scenario impacting India’s capital account flows.
Both these factors have been accentuated by the Russia-Ukraine war since February 2022. The war has only increased the supply-side shocks, driving higher inflation across the world, prompting aggressive central bank actions.

What’s India’s position in this context?
To understand this, let us begin with the background that being a country of net current account deficit, India is dependent on capital flows to balance the deficit. India has built its reserves from the excess of capital flows, unlike many emerging markets, which build reserves from surpluses in the current scenario. In the current scenario, there seems to be pressure on both fronts, which has led to outflows to the extent of $ 28 billion in 2022 YTD and cumulative outflows of ~$ 34 billion since October 2021. Alongside, India’s reserves have declined from a peak of $ 642 billion in October to $ 596 billion, a fall of $ 46 billion.

Both outflows and decline in reserves have some comparable situations in the past two decades…

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