Rupee unlikely to get any tailwind this fiscal: UBS Securities' report

The rupee, which has plumbed the 80-level against the US dollar, is unlikely to get any tailwind this fiscal and may fall further in the medium term due to higher crude prices and imports, says a report.

In the report on Thursday, Swiss brokerage UBS Securities said the rupee, which has lost 7.5 per cent so far this year against the US dollar, will settle at the 80 level by March.

There will be no tailwind for the rupee and it may plumb further in the medium term, given the pressure on the Current Account Deficit (CAD). This will be due to rising trade gaps and the massive sell-off by foreign funds.

Foreign funds have pulled out investments worth USD 29 billion or 4.4 per cent of their India holdings since the beginning of the year.

UBS India Chief Economist Tanvee Gupta-Jain said at the 80 level, the rupee is trading near its fair value from the Real Effective Exchange Rate (REER) basis and by adjusting for the productivity differential with trading partners.

The rupee is trading near its equilibrium value and "even as we expect the rupee to trade at 80 by the fiscal end, there is a risk of rupee to depreciate more in the near term as the current account deficit remains high, which we see more than doubling to 2.9 per cent," she said.

She also noted that compared to its emerging market peers, the rupee has not under performed due to the strong underlying macroeconomic fundamentals.

The forex reserves remain reasonable at USD 580 billion but down from the peak of USD 642.4 billion in September 2021 on valuation adjustment and RBI's market intervention of over USD 40 billion plus in the spot and forward markets so far to support the rupee.

Currently, the forex reserves cover 95 per cent of external debt, up from around 70 per cent in FY13. Imports cover for reserves is at 10.5 months currently, much better than the seven months in FY13 but below the peak of 14.4 months in FY08, the report said.

The external debt increased by USD 91 billion in the past five years to USD 621 billion, which is 19.5 per cent of the GDP but forex reserves rose USD 156 billion during the same period. This indicates external buffers are being created on policy initiatives to withstand global volatility better than the 2013 taper tantrum episode.

Even as the size of external debt of USD 621 billion has increased since FY17 by around USD 150 billion, most of the increase was led by non-resident deposits, commercial borrowings, and the short-term trade credit.

Gupta-Jain expects widening of CAD to 3.5-4 per cent of the GDP in the first half of this fiscal due to slowing exports and sticky imports before moderating in the second half, assuming global commodity prices ease from the current levels.

For FY23, it expects CAD to widen to 2.9 per cent of GDP from 1.2 per cent in FY22 but well below the 4.8 per cent touched in pre-taper tantrum level in FY13.

Capital outflows on the back of the worsening growth-liquidity mix, deteriorating trade balance, slowing global growth amid a tightening global monetary landscape and broad dollar strength have been material headwinds for all currencies and the rupee is no exception, she said.