Rupee At 80: Is This The New Normal?

The U.S. rate hike trajectory and crude oil prices to keep currency on the boil for now.

- V. Keshavdev

“I have learnt that it’s foolish to make a forecast. In these turbulent times, you have to be insane to predict a rate and a date for the rupee!” The comment from forex expert Jamal Mecklai, founder of Mecklai Financial Services, a firm focused on treasury risk management, just goes to show the abstruse outlook experts have on the partially convertible rupee.

On a constant slide for the past 14 weeks, the rupee on July 15 briefly crossed 80 for the first time against the dollar, even as the greenback gained parity with the euro, a first in two decades. The fear is that the rising interest differential will further weaken the rupee as the market expects the US Federal Reserve to opt for a further hike post the 75-bps hike on July 27 meeting as inflation remains red hot — hitting a four-decade high of 9.1% in June. The Fed’s actions come in wake of the geopolitical crisis that has also kept crude oil prices on the boil, above $100.

But unlike the U.S., India remains vulnerable to crude prices with 85% of its daily requirement of 5 million barrels being met through imports. The worry is that if prices average $100 per barrel against the Union Budget estimate of $75, GDP growth will be hit and fiscal deficit will rise significantly. Reserve Bank of India (RBI) estimates show that a 10% spike in oil prices can depress real GDP growth by 20 basis points over the baseline.