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With the US Fed embarking on one of the steepest rate hike cycles in recent times, investors have rushed to the dollar. On Tuesday, the Indian rupee crossed a psychological barrier, touching 80 against the dollar during early trading. While the currency recovered marginally thereafter, ending the day at 79.95, the rupee has been under pressure. This weakness in the currency can be traced to a combination of factors — aggressive tightening of monetary policy by the US Federal Reserve as it attempts to bring inflation under control, the strengthening of the greenback, foreign portfolio outflows and the rush to safe assets as fears of a recession begin to gain traction, and widening current account deficits. However, the Indian currency isn’t alone. Across the world, currencies have fallen against the dollar. In fact, when compared to other currencies, the rupee has fared relatively better.
With the US Fed embarking on one of the steepest rate hike cycles in recent times, investors have rushed to the dollar. The dollar index (which measures the currency’s value against six major currencies), though has corrected of late, has recently registered its highest level since 2002. Higher than expected inflation in the US — inflation rate stood at a 40-year high of 9.1 per cent in June — has only increased the odds of the Fed continuing with its aggressive stance. In fact, many expect it to hike interest rates by 75 basis points when the Federal Open Market Committee meets next week, suggesting that these trends are unlikely to reverse in the immediate. Then there is also the pressure from higher current account deficits. Recent data showed that the goods trade deficit in the April-June period stood at $70.25 billion, more than double the level observed last year. Many analysts are now penciling in a current account deficit upwards of 3 per cent of GDP this year. In the current global macroeconomic environment, financing this will be challenging, lending a depreciating bias to the currency.
On their part, the government and the RBI have announced a series of steps to attract capital inflows to support the currency. These range from relaxations on NRI deposits to easing investments in government and corporate bonds. The central bank has also announced measures for settlement of international trade in rupees to ease pressures on the currency. It has, reportedly, also intervened in the currency markets to stem the rupee’s slide. However, unlike in the past, it should desist from launching a currency defence. It must let the rupee find its own level. A weaker rupee will act as an automatic stabiliser. While in the near term it increases the risks of importing inflation, over time, it will boost the competitiveness of the country’s exports, providing a much needed fillip at a time when the global economy is facing strong headwinds.
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