Rupee Meltdown vs US Dollar

On 21st Nov, the rupee traded at 89.66 against USD, its worst performance so far and an all-time low. This rupee meltdown can be attributed largely to four factors: capital outflows, Uncertainty over the US-India trade deal, High demand for USD & Reduced intervention by the RBI.

A weaker rupee leads to higher costs for imported goods, in our context, crude, which directly increases inflation. Also, higher inflation will prevent the RBI from cutting interest rates, potentially raising loan costs, both home & car loans, for the end consumer

Although export sectors, notably IT & Pharma, will gain, due to a weaker rupee, the benefits are limited as many exporters rely on imported inputs, which become expensive.

More importantly, the trade deficit gets widened, which puts more pressure on INR and thus creates this vicious cycle of further depreciation & inflation.

Despite the RBI having a war chest of $690 billion in foreign reserves, it has refrained from active intervention. Their stance that they do not target or defend any specific level of INR has been consistent. Also, RBI believes that a good trade deal with the US will ease current account pressure & support the rupee naturally.

All exporting countries would want to be competitive, and a weaker currency surely helps their cause.

But this also leads to a currency war of sorts amongst net exporting nations, like China, which are on the wrong end of US trade tariffs. In 2018, when the US imposed 25% tariffs on China, the Renminbi fell sharply by 10%, shaking Asian markets. This time, though, it has depreciated around 1.8 – 2% as the mkts have not fully priced in the large tariff impact & a proactive fiscal intervention by the Chinese central bank has helped the renminbi from any further damage.

At this point in time, RBI’s intervention to stem this rupee meltdown or a favourable US–India trade deal looks like a plausible solution. But we should keep an eye on the US Fed’s stance on its interest rates.USD will depreciate if the interest rate gets cut, which will eventually help our cause. In the absence of which, we are getting into a very long & cold winter…