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The droopy rupee: Can India's currency be revived?

Central Bank Rate Rise Expected This Week As Inflation Menaces Economy


NEW DELHI -- India's central bank is expected to announce another rise in interest rates at the end of a three-day policy meeting that begins Monday, but economists and traders aren't betting it will ease the slide of the rupee.

The currency suffered its fifth monthly decline in a row in May, amid relentless selling by foreign institutional investors, slowing economic growth, and a spike in inflation that alarmed the Reserve Bank of India so much it delivered an unexpected rate increase between meetings on May 4.

The rupee set new all-time lows last month, breaching 77 rupees to the dollar for the first time, and was trading on Friday at 77.61, 3.8% lower than at the start of the year.

"Inflation concerns prompted the RBI's surprise rates liftoff last month, but the action did little to alleviate the downside pressure on the rupee," Alvin Tan, currency strategist at RBC Capital Markets, wrote in a note to clients. "High energy prices are a traditional bane for the currency due to India's heavy dependence on energy imports, and that is all too evident lately."

A majority of 53 analysts surveyed by Reuters expect another rate rise, with estimates ranging from 10 to 75 basis points. A report on Thursday by the government-run State Bank of India pegs the move at 50 basis points, which would take rates to 4.9%.


The central bank has signaled it will likely maintain its aggressive stance, for fear that inflation will crimp economic growth.

"Given the already high expectations regarding RBI policy normalization baked into the market... it will be difficult for the rupee to gain ground in the near term," Tan wrote.

Consumer price inflation in April increased to an almost eight-year high of 7.8%, mainly driven by food and fuel prices, above the central bank's upper tolerance limit of 6% for four consecutive months now.

While exporters benefit from a weaker rupee, the depreciation has stoked inflation. India runs a trade deficit, relying on imports of commodities such as edible oil, crude and electronic goods, for which it has to now pay more in dollars. According to Acuite Ratings, its current-account deficit is expected to balloon to $85 billion in the current fiscal year, from an estimated $44 billion last year.

Inflationary pressures triggered by the rising cost of imports have impacted household budgets, threatening to curb consumption. "Everything has become so expensive," complains Prakash Mohan, 32, a pharmacy worker in New Delhi who is the breadwinner for a family of four. The price of a 14.2-kilogram domestic cooking gas cylinder -- which barely lasts a month -- has been raised three times since March, adding over 10% to the cost, he said. "Even eating food at home [has become] expensive."

Rajinder Singh, who runs a vegetable shop in central Delhi, says a kilo of tomatoes has gone up to 45 rupees from 25 rupees in March, and the price of potatoes has doubled, since he has to import from other states and the cost of transportation has gone up with fuel prices. "Customers crib a lot now," he said.

The Modi government has cut fuel duties and increased subsidies on fertilizers and cooking gas for the poor, but a wider fiscal deficit only adds to fretting about the rupee.


The RBI has been intervening in the foreign exchange markets to arrest steep falls in the rupee by selling dollars, depleting currency reserves.

According to Acuite Ratings, India's gross reserves declined from $633.6 billion at the start of the year to $595.9 billion as of May 6, "reflecting the heightened pressure" on the Indian rupee. "It has not only breached the level of 77 [rupees to the dollar] but may also breach 78 in the short term if the capital outflows continue unabated," the rating agency said.

A BofA Securities report showed foreign institutional investors were pulling money out of India for the eighth straight month in May, taking the total outflow since the start of the year to more than $20 billion by May 25. Only Taiwan has seen heavier outflows this year among emerging markets, the report said.

"A very sharp depreciation in the rupee will be bad for the economy," Bidisha Ganguly, chief economist at the Confederation of Indian Industry, told Nikkei Asia. However, the RBI has the firepower to keep up its interventions, and its monetary tightening is yet to feed through. "Typically, an increase in interest rates tends to moderate the depreciation, and we are expecting more hikes [this year]."

Economists say the currency is at the mercy of global events. N.R. Bhanumurthy, vice-chancellor of the Bengaluru-based Dr. B.R. Ambedkar School of Economics University, said: "Our domestic economic drivers are robust and intact except for the external conditions, especially the expected global economic slowdown following tightening of monetary policy by advanced countries, and also due to global commodity price shocks."

India's economic growth slowed to 4.1% in the January-March quarter, owing to rising inflation stemming from the Ukraine war, and to restrictions imposed to deal with the omicron COVID variant.

"If [the Ukraine] war continues and oil prices rise to $140-150 per barrel [from around $110 now] that will obviously create problems for [the currencies of] India and many other countries," said V. Upadhyay, adjunct professor of economics at the Indian Institute of Technology Delhi. The rupee is by no means the worst performer against the dollar this year; the euro, Japanese yen and Chinese yuan have all declined by more.

Capital Economics, a research firm, predicted further interventions by the RBI to help maintain stability. It says the rupee could weaken to 80 per dollar by the end of 2023, "implying significantly less depreciation against the U.S. dollar than we expect for most other [emerging market] currencies."

"RBI's intervention in the forex market right now is not to either allow the rupee to appreciate or depreciate," Sunil Sinha, principal economist at India Ratings and Research, told Nikkei Asia. The aim is to ensure that whichever way the rupee moves, it moves in an orderly manner and that it should not cause any disruption to macroeconomic stability, he said.

Additional reporting by Nupur Shaw in New Delhi