The Indian rupee slipped to its lowest level in two weeks on Wednesday, as investors remained cautious amid rising tensions between Russia and Ukraine, the spread of the Omicron variant, and the prospect of tighter monetary policy in the US and other major economies.
The rupee closed at 75.83 per US dollar, down 0.3% from its previous close of 75.59. It touched an intraday low of 75.88, its weakest level since December 13. The rupee has lost 1.4% against the dollar so far this month, and 5.6% this year.
The rupee was under pressure from multiple factors, including:
- The escalation of geopolitical tensions between Russia and Ukraine, which raised the risk of a military conflict and increased the demand for safe-haven assets such as the US dollar and gold.
- The surge in Covid-19 cases due to the Omicron variant, which threatened to derail the global economic recovery and prompted some countries to impose travel restrictions and lockdown measures.
- The expectation of faster monetary tightening by the US Federal Reserve and other central banks, which boosted the yields and attractiveness of their currencies. The Fed signaled last week that it would raise interest rates three times next year and end its bond-buying program in March, while the Bank of England and the European Central Bank also hinted at policy normalization in the near future.
Rupee outlook remains uncertain
The outlook for the rupee remains uncertain, as the domestic and global factors that weigh on it could persist or worsen in the coming weeks and months.
On the domestic front, the rupee could face further pressure from:
- The widening of the current account deficit, which measures the gap between the country’s imports and exports of goods and services. The deficit widened to $19.8 billion, or 2.4% of GDP, in the July-September quarter, from $6.5 billion, or 0.8% of GDP, in the previous quarter, according to the Reserve Bank of India (RBI).
- The increase in inflation, which erodes the real value of the rupee and reduces the purchasing power of consumers and businesses. The consumer price index (CPI) rose to 4.9% in November, above the RBI’s target range of 2-6%, while the wholesale price index (WPI) soared to 14.2%, the highest in over a decade.
- The slowdown in economic growth, which reduces the demand for the rupee and the confidence of investors. The gross domestic product (GDP) grew by 8.4% in the July-September quarter, lower than the 9.5% expected by analysts and the 20.1% recorded in the previous quarter.
On the global front, the rupee could face further pressure from:
- The uncertainty over the Omicron variant, which could pose a new challenge to the global health and economic situation. The World Health Organization (WHO) has warned that the variant is spreading faster than any previous one and could have a severe impact on the unvaccinated and vulnerable populations.
- The volatility in the oil market, which affects the country’s import bill and fiscal balance. India is the world’s third-largest oil importer and depends on crude imports for about 80% of its oil needs. The oil prices have been fluctuating in the past few weeks, as the demand and supply dynamics have been affected by the Omicron variant and the OPEC+ output policy.
- The divergence in the monetary policy stance of the major central banks, which could create imbalances and instability in the global financial markets. The RBI has maintained an accommodative stance and kept its key interest rate unchanged at 4% since May 2020, while the Fed and other central banks have signaled a hawkish shift and prepared to raise their interest rates and taper their stimulus measures.
Rupee may find some support from positive factors
Despite the downward pressure, the rupee may find some support from some positive factors, such as:
- The robust foreign portfolio inflows, which reflect the attractiveness of the Indian assets and the confidence of the foreign investors. The foreign portfolio investors (FPIs) have invested a net amount of $8.4 billion in the Indian equity and debt markets in December so far, taking the total inflows for the year to $37.4 billion, according to the National Securities Depository Ltd (NSDL).
- The intervention of the RBI, which has been intervening in the foreign exchange market to prevent excessive volatility and maintain adequate liquidity. The RBI has been buying dollars and selling rupees to curb the appreciation of the rupee in the past few months, and has also been selling dollars and buying rupees to support the rupee in the recent weeks. The RBI’s foreign exchange reserves stood at $642.5 billion as of December 17, the second-highest in Asia after China.
- The improvement in the trade balance, which measures the difference between the country’s exports and imports of goods. The trade deficit narrowed to $8.7 billion in November, from $10.9 billion in October, as the exports grew by 21.4% year-on-year to $34 billion, while the imports rose by 12.6% year-on-year to $42.7 billion, according to the Ministry of Commerce and Industry.
