Will the Indian rupee break the 80/$ barrier?

The big story in the last few weeks has been the persistent weakness in the rupee. Back in May 2022, the eminent currency expert, Jamal Mecklai, has predicted that 80/$ could not be ruled out for the Indian rupee. In the middle of July, we are almost there with only the sustained RBI intervention holding the rupee. In the last few days, the way the rupee has gone all the way to 79.95/$ and then come back is an indication that there is heavy RBI intervention, although it cannot be expected to continue for too long.

What could trigger the fall beyond 80/$ for the Indian rupee. There are two immediate triggers. The first is the forthcoming FOMC meet towards the end of July. While the markets are factoring in 75 bps rate hike, there is an outside chance of a 100 bps rate hike. If that were to happen, then the dollar would surge in value leaving the rupee in trouble. The other trigger is that dollar hedging demand has been consistently building from importers and dollar borrowers. That could push demand for the dollar and weaken the rupee.

The weakness in the rupee began with the persistent FPI selling. In fact, FPIs have sold close to $36 billion since October 2021 putting tremendous pressure on the Indian rupee. This was followed by rampant inflation which again weakened the rupee. Look at things in perspective to get a true picture. At the start of 2022, the rupee-dollar exchange rate was at 74. But recession fears, Russia’s invasion of Ukraine and the resultant spike in oil and gas prices have put steep pressure on the rupee as India relies on oil imports for 85% needs.

The consensus on the street is that the rupee-dollar exchange rate would almost certainly cross the 80/$ mark and even get closer to the 81/$ mark. Most analysts do expect that the Federal Reserve would hike the interest rates by 75 to 100 basis points with the latter looking like a distinct possibility as the Fed wants to give a picture that it is dead serious about controlling runaway inflation. Higher rates would again make dollar assets attractive and come what may, the dollar continues to be one of the safest havens in bad times.

Let us talk about the second key trigger, which is more of a technical factor. Most of the importers and borrowers keep their dollar exposures only partially hedged making provisions for a minimal depreciation in the rupee. Events like these are rare and once they cross that 7-8% threshold, there is likely to be a panic buying of dollars. That is the situation that most of the analysts fear could happen resulting in a sharp fall in the rupee versus the US dollar. For now, it looks like 80/$ could easily happen and perhaps get close to 81/$.