Let the Rupee fall! Indian currency set to hit Rs 75 mark!

Reserve Bank of India’s (RBI) stance on the forex market will put pressure on the rupee. The central bank, in its monetary policy last week, made it clear that it will not try to defend the rupee through a rate hike.

Reserve Bank of India’s (RBI) stance on the forex market will put pressure on the rupee. Image source: Reuters

Reserve Bank of India’s (RBI) stance on the forex market will put pressure on the rupee. The central bank, in its monetary policy last week, made it clear that it will not try to defend the rupee through a rate hike. The monetary policy statement said that RBI is largely tolerant of the rupee depreciating and finding its market determined value.

On October 5, the rupee fell to a record low of Rs 74.23 against the dollar in the spot market before closing at Rs 73.74 to the dollar. The rupee so far has depreciated 15.84% (January to October 5, 2018).

Exchange rate concern would bother the central bank only if it feeds into the domestic inflation. But the base effect cushioning the actual inflation forecast until December would be a relief for RBI, which revised its inflation projections downwards.

“Now, it looks like the rupee is poised to fall below Rs 75. With the current account deficit (CAD) widening, RBI and the government would not mind the rupee depreciating further,” said a forex dealer. DBS Bank has also forecast the rupee to weaken to 75 per dollar levels.

CAD widened to $15.8 billion in the first quart of this fiscal, which is around 2.4% of the GDP. In the January to March quarter, the trade shortfall stood at 1.9% of GDP.

“There is no target or band around any particular level of the exchange rate, which is determined by the market forces of demand and supply,” RBI governor Urjit Patel said. He said RBI’s response would be to see the foreign exchange market remains liquid with no undue volatility. Last week, Brent crude oil crossed $85 a barrel with Organization of Petroleum Exporting Countries unwilling to raise production. The oil price has risen 27.68% from $66.57 in the beginning of the year.

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Abheek Barua, chief economist at HDFC Bank, said, “It is clear that RBI would let the market forces prevail and would not try to defend any particular level of exchange rate.”

Economists and treasury experts said RBI will not mind letting the rupee depreciate a bit more so that the current account deficit can be bridged to some extent, unless it becomes a threat to inflation.

“If the rupee depreciates further, the RBI will have to hike interest rates to control imported inflation. While that’s not a done deal yet, element of uncertainty around rupee and oil prices could keep the bond investors edgy,” Barua said.

Source: DNA Money

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