Where is the rupee headed?

Despite depreciating, it looks satisfactory ona comparative scale. Being a country with a current account deficit means the rupee should weaken

- MADAN SABNAVIS

THE IRAN WAR has evidently turned the markets upside down. What appeared to be going well for the world economy has now become an uncertain spectre., The stock market continues to display nervousness with no ending sight.Buta factor which affects all countries is currency,and the rupee is once again under pressure. With the 92 mark being breached, the logical question is, how much higher or lower can it go?

The answer is really a shrug because one does not know the intensity and length of the war. The rupee will be driven by two sets of factors—the fundamentals (imports, remittances, foreign portfolio investors [FPIs]) and the strength of the dollar. This is the challenge forthe Reserve Bank of India (RBI) which has, so far, dexterously steered the currency away from volatility. The issue is that whenever one speaks of the rupee, it is necessary to also see how other currencies are faring. Absolute depreciation numbers do not connote much as the current spate of movements is interlinked with what happens to other currencies.

Within the fundamentals, the obvious factor pressuring the rupee is the higher cost of imports. As oil is the largest component of the basket, any increase in price gets added to the trade deficit. Products like fertilisers and chemicals also get affected indirectly, which widens the deficit. On the other hand, the increase in exports may not work out given that the direction is also to countries embroiled in the war.