Indian rupee likely to weaken after US Fed delivers yet another steep rate hike
A widening interest rate gap between India and the US, as the Fed aggressively raises rates, has been the main factor pushing the Indian rupee to record lows.
MUMBAI: The Indian rupee is expected to remain under pressure against the US dollar in the coming months, after the United States Federal Reserve jacked up interest rates yet again to cool red-hot inflation.
The US central bank on Wednesday (Nov 2) raised the benchmark lending rate by 0.75 percentage point, the sixth hike this year.
A widening interest rate gap between India and the US has been the main factor pushing the Indian rupee to record lows, with the Fed aggressively raising rates.
The Indian rupee is trading at around 82.8 against the dollar.
A weak rupee is one of the factors that is exacerbating India's high inflation levels.
The Reserve Bank of India (RBI) has called a special meeting on Thursday to discuss missing its inflation target, which requires the central bank to write a letter to the government.
INDIAN RUPEE UNLIKELY TO RECOVER SOON
But observers believe the Indian currency is unlikely to recover any time soon and could weaken further, beyond the record low of 83 rupees per US dollar that it hit last month.
“I don't expect that the rupee will strengthen from here,” said Trust Mutual Fund chief executive Sandeep Bagla. “I think the rupee has a good chance of weakening to about 85 to the dollar, from the 83.
“Because we simply don't have the flows. And the RBI has spent about US$100 billion in trying to defend the rupee without much success.”
The rupee has fallen more than 10 per cent against the US dollar this year, a slide that has prompted India’s central bank to tap into its dollar reserves to try to support the currency.
However, there is a limit to how long it can keep doing this, said observers.
“The rupee has not fallen to the extent that other emerging market currencies or even developed market currencies are falling,” said Mr Bagla.
“So I think there's some catch-up there, which could take place through the next three months.”
INDIA’S INFLATION WOES
This poses a challenge when it comes to inflation, which hit a five-month high in India in September.
The cost of imported goods such as crude oil becomes more expensive as the currency weakens, which weighs on India's current account deficit.
The RBI is holding a special meeting on Thursday after failing to keep inflation within the 2 to 6 per cent target band for three straight quarters. Inflation has remained above 6 per cent since January.
The central bank has to explain its failure to the government and how it plans to bring inflation under control.
Indian shares were muted on Thursday. But going forward, many analysts expect India’s equity markets to continue rising, helped by strong inflows from retail and institutional investors.