Rupee breaches 80/$ for first time, settles at 79.95 after RBI intervention

The rupee on Tuesday weakened past 80 per dollar for the first time but went on to recover lost ground against the greenback owing to interventions by the Reserve Bank of India (RBI) and persistent sales of dollars by exporters, dealers said.

The rupee plunged to its lifetime low of 80.06 per US dollar in early trade before recouping all losses to close at 79.95. On Monday, the domestic currency had settled at 79.98 a dollar — an all-time closing low. The rupee has depreciated 7.01 per cent against the dollar this year.

The government, however, said the rupee was managed well and there was nothing to be “overtly” worried about the depreciation in the domestic currency against the dollar. The rupee had appreciated against several global currencies like the British pound, Japanese yen, and Euro, and this had made imports in these currencies cheaper compared to the dollar, Economic Affairs Secretary Ajay Seth said on Tuesday.

The falling rupee may adversely impact central government finances through a higher subsidy bill, even though higher import bill may yield additional government revenues, economists said.

While the rupee breached the psychologically significant 80-per-dollar mark on Tuesday, currency traders said a confluence of factors had lent support to the currency.

These included the RBI’s intervention at the 80 level, a weaker dollar index, strength in domestic equities, and firm dollar sales by banks on behalf of exporters.
 

The US dollar index, which earlier this month had ascended to 20-year highs, has seen a significant retracement over the last couple of trading sessions as comments by Federal Reserve officials hinted at the central bank raising rates by 75 basis points (bps) at its meeting later this month instead of 100 bps, as feared by markets.

The dollar index, a gauge for the US currency against six major currencies, was at 106.60 at the 3:30 pm IST, much lower than 108.06 the same time on Friday, the Bloomberg data showed.

With a large part of the rupee’s 7 per cent year-to-date depreciation having occurred over the last month, several traders were of the view that the currency might not fall much from current levels.

“A lot of negatives are already priced in. We feel the rupee is in the last leg of weakness. With broad commodity prices correcting, supply chains improving, and oil prices in control, the dollar index is likely to make a top soon,” IFA Global’s CEO Abhishek Goenka said.

Goenka was of the view that overseas investment flows would return to India in the second half of 2022, and that the current levels for the dollar-rupee pair should encourage exporters to slowly step up sales of the greenback, thus protecting the rupee.

Foreign portfolio investors have net sold more than $30 billion worth of Indian assets so far in 2022, the highest outflow on record, the NSDL data showed.

The strong defence provided by the RBI’s formidable foreign exchange reserves was also cited as a factor that would rein in volatility for the rupee, even in the face of a widening current account deficit, experts said.

“Emerging market currencies are better placed than earlier because of forex reserves and because of the way their central banks have been proactive. From that perspective, we are not too worried about INR,” Jayesh Mehta, India Country Treasurer, Bank of America, told Business Standard.

“If dollar strengthening happens to be so much stronger, then of course, emerging markets are impacted, including the rupee. We believe that forex reserves being where they are, even if we were to have a current account deficit, which is around 3-3.5 per cent, we will manage the situation, and the rupee will not go into a free fall,” he said.

At $580.3 billion, India’s forex reserves are around $51 billion lower than the levels they were in late February, when the Ukraine war started. The headline reserves, however, are more than twice the amount they were during the Global Financial Crisis of 2008 and the Taper Tantrum of 2013.

Analysts also pointed out that while the rupee had depreciated against the US dollar, it had strengthened against certain major currencies such as the euro, British pound, and Japanese yen.

From 84.21 to a euro on December 31, 2021, the rupee was last at 81.87 per euro, the Bloomberg data showed. The rupee’s appreciation versus the British pound has been starker, with the domestic currency settling at 96.08 to a pound on Tuesday, as against 100.44 on December 31.

A weaker rupee is positive for exporters, particularly for the Indian IT sector, while it’s a mixed bag for the pharmaceutical industry.

The US contributes over 50 per cent to the IT industry revenue, so any fall in the rupee against the dollar increases their earnings. A 100 bps fall in rupee against the dollar boosts operating profit margins by 30 bps, analysts say. At the same time, the dollar strengthening against currencies like GBP, euro, and yen, negatively impacts the industry. After the US, the UK and Europe are the largest markets for the sector. This was also visible in June quarter results of Indian IT firms. Moreover, travel, visa and salary expenses are on the rise.

So far as the pharmaceutical sector is concerned, the benefits from a weak rupee may get offset by rising input costs. The industry imports active pharmaceutical ingredients (APIs) and other raw materials needed to manufacture drugs, the bulk of it from China. Besides, prices of key APIs are up 30-140 per cent, while freight and power costs have also risen in recent months.

In the auto sector, the conventional vehicle makers such as Bajaj Auto should gain, given that the two-wheeler major derives close to half of its revenue from exports. The exact gains will depend on the level at which the company has hedged its forex exposure.

Textile and readymade garment manufacturers as well as gems and jewellery makers are upbeat over the rupee’s depreciation. However, many textile and garment producers say that while the margin gains in the short term will be around 5-10 per cent, buyers of their goods have already started asking for discounts and price renegotiation. Jewellery exporters though should be able to sustain the gains as most of their exports and imports are dollar-denominated, while expenses such as salaries are in local currency.

(With inputs from BS Reporters in Mumbai, Ahmedabad, Chennai & Delhi)