The rupee has depreciated against the US dollar in recent weeks, crossing $76/$ from $74.5/$ on March 16, before the conflict between Russia and Ukraine started on February 24.

The liquidity rundown and the onset of rate hikes by the US Federal Reserve, coupled with the conflict between Russia and Ukraine, will see the rupee fall further in March 2023, stabilizing at around $77.5/$, according to Crisil Research.

“Two factors will play a critical role in driving the weakness: higher energy prices that will widen the current account deficit, and US Fed rate hikes leading to some capital outflows. But as the Reserve Bank of India (RBI) is expected to continue to intervene in forex markets to contain volatility, a sharp depreciation of the rupee could be avoided, although it could face short-term volatility as long as geopolitical tensions persist.” , it said.

The rupee has depreciated against the US dollar in recent weeks, crossing $76/$ from $74.5/$ on March 16, before the conflict between Russia and Ukraine started on February 24.

For the rupee, the agency said risks are clearly on the downside, with an escalation or even delayed de-escalation in the geopolitical conflict likely to push energy prices further and widen the current account deficit. “Assuming crude oil will average $85-90 a barrel in fiscal 2023, we don’t expect Indian macros to test the 2013 levels, when India was named part of the ‘fragile five’ – a group of emerging markets which is vulnerable to capital outflows due to their weak macroeconomic fundamentals.”

However, Crisil Research noted that unlike the 2013 taper-tantrum episode, the rupee has held up quite well this time around compared to how it behaved during similar episodes before. “India is better able to withstand external shocks than in the 2013 and 2014 budgets, although it is not completely isolated,” it said.

Other emerging market (EM) currencies have also generally witnessed orderly currency movements, depending on their reliance on crude oil and the extent to which the US Fed’s measures are adjusted. As a result, the rupee has depreciated more than its counterparts in the past month, it noted.

Indian exporters believe the weakening currency would partially offset the impact of increased shipping costs and supply chain disruptions in the wake of the Russia-Ukraine crisis. If the rupee stabilizes at a depreciated level in the next month or so, it will support exports, they believe.

But at the same time, a weak currency – coupled with a spike in global crude oil prices – would push India’s import bill and put pressure on the current account, as New Delhi is a net importer of commodities. This will also lead to inflation and further increase the already elevated input costs for companies and further erode their margins, senior corporate executives warn. Even large corporate currency hedging costs go up in such situations.


This post The slide of the rupee probably won’t be sharp: Crisil was original published at “https://www.financialexpress.com/market/rupees-slide-unlikely-to-be-sharp-crisil/2464542/”

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