Through the turmoil of the past few months, one thing has remained constant: the slide of the rupee against the US dollar. In recent months, the Indian currency has touched new all-time lows and experts say the downward ride is not over yet. The rupee has declined by about 25 per cent against the dollar since December 31, 2014, Finance Minister Nirmala Sitharaman told the Lok Sabha recently, citing data from the Reserve Bank of India. On December 31, 2014, the exchange rate stood at Rs 63.33 against the dollar, while on July 11 this year, the number was at Rs 79.41, Sitharaman had said in Parliament in response to a question.
Why did the rupee depreciate, especially in recent months? According to Sitharaman, global factors such as the Russia-Ukraine conflict, soaring crude oil prices and tightening of global financial conditions were the major reasons for it weakening against the dollar. As of July 29, the rupee has declined 7 per cent against the dollar in the past one year.
There seems to be no respite in sight for the rupee. According to some experts, the Indian currency will continue to remain under pressure for the rest of the year—especially with the US Federal Reserve raising rates by a total of 150 basis points (bps) in June and July, and signalling that it could raise rates again, if necessary, in September. With the US Fed raising rates, emerging market economies like India are likely to see a flight of capital, which in turn would exert more pressure on the Indian currency, leading to it depreciating further. Industry watchers estimate that in the backdrop of the aggressive rate hikes by the US Fed and India’s rising trade and current account deficits, the exchange rate could be at Rs 81-82 to a dollar by the end of the year.
For instance, Abhishek Goenka—Founder and CEO of forex advisory firm IFA Global—expects the rupee to head towards `81 to a dollar by the year-end. According to Anil Kumar Bhansali, Head of Treasury at Finrex Treasury Advisors, a treasury and forex consultancy firm, the rupee will fall to 80.50-levels by September, and stabilise around this level until December. Agrees Jigar Trivedi, Research Analyst at Anand Rathi Shares & Stock Brokers. He says that the rupee will hit 80.5-81-levels by the end of 2022.
However, according to financial services major Nomura, the Indian currency may reach Rs 82 to a dollar between July and September because of a number of negative factors—including the year-long US Fed rate hikes and India’s deteriorating balance of payments dynamics. Ratings and analytics firm Crisil, however, is a bit more optimistic: it expects the exchange rate to settle at Rs 78 to a dollar by March 2023.
The Silver Lining
But every cloud has a silver lining. The depreciating rupee is likely to boost the localisation of components in the consumer durables segment. “Wherever possible, we are trying to localise these raw materials. However, the local manufacturer is still dependent on imports of key raw materials, and hence we cannot eliminate the impact of rupee depreciation completely. Localisation can help reduce the impact of customs duty,” says Kamal Nandi, Business Head and Executive Vice President of Godrej Appliances, which is a part of Godrej & Boyce.
However, Satish N.S., President of Haier Appliances India, is of the view that the depreciating rupee will have a limited impact on the pricing of his company’s products. “With more than 90 per cent of Haier products [being] manufactured at our two industrial parks in Ranjangaon, Pune, and Greater Noida, we are hopeful that the ‘Made in India’ products will” see a limited impact on their prices, he says. “We are constantly striving to minimise the impact of these factors on our consumers.”
Amidst the economic uncertainty, it is good to have some factors that remain constant. However, most would agree that a spiralling rupee is one constant we could have done without.