5% drop in Rupee in 2022

Rupee has dropped 5% in 2022 in comparison to US Dollar.  USD vs INR was trading at 74.57 on 1st January and now it is at all time record high of 78.19.  

                        

Major factors responsible for this significant depreciation of Indian Rupee are as below

• High Inflation in USA (8.6% as on May 2022) and consequent three times interest rate increases (0.25% in March, 0.50% in May & 0.75% in June) by US Federal Reserve has moved funds from emerging economies like India to US thereby depreciating the Rupee.  The high point here is further rate increase is anticipated from US Federal Reserve so Rupee will continue to be under pressure in the near future.
• Oil the largest item to be imported into India is having a bull run due to multiple factors including Ukraine war.  Oil is up by 26% in 2022 currently trading at levels of $ 106 compared to $ 77 at the beginning of 2022.  As per data from Petroleum Planning & Analysis Cell (PPAC) India imported oil worth of $ 120.4 Billion in 2021-22 which was 25% of all imports by India.  With increased costs in 2022 it is estimated that imports for the month of April 2022 will be a whopping $ 16.2 Billion.  The key point to note here is cost per MMT of oil was $ 316 in 2020-21, $ 568 in 2021-22 & $ 775 in 2022-23.  This effectively means price increase between 2021-22 & 2022-23 is around 36%. This increase in import costs of oil is exerting pressure on Rupee as there is high demand for USD and USD is strengthening 

 

• Foreign exchange reserves are currently at $ 596 Billion compared to  $ 635 Billion in September 2021 signalling a drop of 10% in 8 months.  This depreciation in reserves is mainly attributed to Reserve Bank of India intervening in the Rupee market and selling Dollars to curtail depreciation in Rupee.  This though to a certain extend holds Rupee depreciation brings in uncertainty in minds of investors and impacting the Rupee  

Impact of this Rupee Deprecation

Depreciation of the Rupee is good for export oriented sectors especially Information Technology, Pharmaceuticals & Organic Chemicals.  However it impacts in a significant way imports and thereby cost of products in India.  With India already facing a high inflation of 7% Rupee depreciation will fuel it further and make it move upwards which will be a big challenge, already RBI has increased interest rates by 0.9% in 2022 to 4.9% to combat inflation.  Rupee depreciation will also bring more strain to the balance of trade position which already is in negative (imports more than exports) territory for long time now.  Forex reserves will continue to be under pressure.  

Overall it will be a challenging situation for India to keep Rupee under wraps and not allowing it to depreciate significantly.  With the current situation prevailing my estimate for the rupee will be 79 to 81 by end of this year.