Rupee Depreciation Pressure To Ease In Q4: IDFC First Bank’s Gaura Sengupta
IDFC First Bank’s Chief Economist Gaura Sengupta expects some relief for the Indian rupee as in the fourth quarter the domestic unit improves. Trade deficits narrow, flows from balance of payments also improve.
In case a trade deal between the US and India gets announced, it will give a temporary relief. Then, the depreciation should resume, she said.
The Indian currency is facing pressure because of the capital outflows. There is a sharp slowdown in capital inflows to India. The Balance of Payments is showing a negative $11 billion in July–September versus the usual surplus number, she said.
Reserve Bank of India’s Impossible Trinity
On Wednesday, during the session, the Indian currency slumped 42 paise to a record low of 90.30 against the US dollar.
The Reserve Bank of India is facing the impossible trinity. The central bank either needs to choose between monetary policy or a stable currency. Wisely, it has chosen the monetary policy, Sengupta said.
The less they intervene, the less will be the strain on foreign exchange reserves and as well as on the banking-system liquidity. When RBI buys the rupee, the liquidity dries up in the domestic banking system. So, the less the RBI hides the depreciation pressure, the more freedom it gets on the monetary policy front, she said.
Long-Term Perspective
From a long-term perspective, it is also a sustainable strategy because RBI has a limit too. The central bank does not target a particular level, which is proven from the pace of depreciation. This calendar year, the rupee has depreciated 5% year on year compared to the usual 3–4% decline rate. So, the RBI is allowing the rupee to depreciate maybe because of the tariffs, according to Sengupta,
The intervention strategy is showing that the central bank has limitation. Last year, the rupee emerged as the most stable currency globally because of the central bank. However, it came up with a cost as short-dollar forward books built up. This calendar year, the RBI does not have the forward book as a tool to sterilise intervention as it does for spot markets, she said.
For investors looking to navigate the complex Indian stock market, it’s essential to stay informed about the latest developments in the currency market. The rupee’s depreciation can have a significant impact on the Nifty and Sensex, as well as the overall Indian economy.
Impact on Indian Economy
The rupee’s depreciation can make Indian exports more competitive in the global market, which can lead to an increase in export demand and subsequently, an increase in economic growth. However, it can also make imports more expensive, which can lead to higher inflation and higher production costs for Indian businesses.
Therefore, it’s crucial for investors to keep a close eye on the rupee’s movements and its impact on the Indian stock market. By doing so, they can make informed investment decisions and navigate the complex and ever-changing landscape of the Indian economy.
In conclusion, the Indian rupee is expected to see some relief in the fourth quarter as trade deficits narrow and flows from balance of payments improve. However, the depreciation pressure is likely to resume if a trade deal between the US and India is announced. The Reserve Bank of India’s intervention strategy is limited, and the central bank has chosen to prioritize monetary policy over a stable currency.
Investors should stay informed about the latest developments in the currency market and its impact on the Indian stock market and economy. By doing so, they can make informed investment decisions and navigate the complex and ever-changing landscape of the Indian economy.
Key Takeaways
- The Indian rupee is expected to see some relief in the fourth quarter as trade deficits narrow and flows from balance of payments improve.
- The depreciation pressure is likely to resume if a trade deal between the US and India is announced.
- The Reserve Bank of India’s intervention strategy is limited, and the central bank has chosen to prioritize monetary policy over a stable currency.
- Investors should stay informed about the latest developments in the currency market and its impact on the Indian stock market and economy.