Rupee to weaken further despite narrower current account deficit
The Indian rupee has depreciated significantly this year and is expected to weaken further due to global conditions. Despite improvements in the current account deficit, ongoing foreign portfolio outflows create pressure on the currency. High crude oil prices continue to inflate the import bill, exacerbating the rupee's depreciation. Recent interventions by the Reserve Bank of India aim to…
Mumbai: Economists predict the Indian rupee will weaken further, even though the current account deficit (CAD) has narrowed to approximately 0.5% of GDP from around 2.5% three years ago. Tighter global financial conditions and persistent outflows of foreign portfolios are making it challenging to bridge the deficit gap, analysts say.
The rupee has lost 5% this year, and further depreciation seems likely despite the Reserve Bank of India's (RBI) ongoing interventions, as external pressures remain beyond its control.The rupee ranks as the fourth-worst performing currency in Asia this year, with the Indonesian rupiah being the weakest, falling by 7.3% according to Bloomberg data.
Meanwhile, the South Korean won showed the best performance, gaining 8.5%, while China's yuan increased by 4.6% this year.According to Dhiraj Nim, an economist and FX strategist at ANZ Bank, the size of the deficit that can be covered without adversely affecting the exchange rate or foreign exchange reserves needs to be recalibrated as global capital becomes scarcer and more expensive.
The anticipated CAD for FY27 is projected to be between 1-1.5% of GDP, which could be tough to fund, Nim argues.Another factor contributing to potential rupee weakness is the elevated price of Brent crude oil, which is nearing $105 per barrel. As one of the world's largest oil importers, India faces the risk of an increased import bill, which adds to inflationary pressures and negatively impacts the currency.
Furthermore, persistent foreign portfolio outflows are intensifying the pressure on the rupee, as sustained selling of Indian assets drives up dollar demand, reinforcing the outlook for further rupee depreciation.Even with recent measures, there appears to be limited scope for sustained INR appreciation, considering the manufacturing and trade competitiveness of the country.
The outlook for foreign portfolio flows remains challenging, suggesting the possibility of continued gradual depreciation of the rupee, with high sensitivity to oil price fluctuations and risk sentiment, according to Radhika Rao, a senior economist at DBS Bank. Recently, the RBI introduced a special window to address the daily dollar requirements of three state-run oil companies, diverting their purchases away from the spot market.
Additionally, the central bank has tightened rules on foreign-exchange derivatives to curb speculative dollar demand and excessive hedging activities.
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